review was not concerned with Northern Ireland since the development of Belfast Airport does not impinge upon the provision of airport capacity in Great Britain. Neither was it concerned with the Channel Islands or the Isle of Man.

CONSULTATIONS ON AIRPORTS POLICY

3 The Roskill Commission produced one of the most thorough examinations ever undertaken of the options for a major project of public investment. Yet the conclusions of the Commission, in a changing economic climate, were shown within a few years to be based on assumptions of rates of growth of air traffic which were unlikely to be achieved, while the pace of technological development and its effects had been more rapid than expected. Moreover, the recommendation of the Commission, for a new airport on an inland site at Cublington, was itself rejected by the Government. This experience suggested a certain caution, and the need to recognise the wider implications, in the case of projects involving the commitment of vast public resources and affecting many millions of people.

4 The Government decided that, for the future, it was essential to ensure that decisions concerning the development of particular airports were reached after taking full account of the views of all those who use, work at, or are affected by, them. To facilitate this process, and to ensure a wider understanding of the issues the Government produced a two part consultation document "Airport Strategy for Great Britain". Part 1, published in November 1975, covered the London area airports and Part 2 published in June 1976 dealt with the regional CE(78) 1 - Annual Review of Agriculture 1978. Note by the Minister of Agriculture, Fisheries and Food

2 - Memorandum for Liaison Committee on Exchange Control. Note by the Chancellor of the Exchequer

3 - The Green Pound. Memorandum by the Minister of Agriculture, Fisheries and Food

4 - White Paper on Airports Policy. Memorandum by the Secretary of State for Trade

5 - Future Pay Policy. Memorandum by the Chancellor of the Exchequer and the Secretary of State for Employment

6 - Special Employment Measures 1978-79. Memorandum by the Secretary of State for Employment

7 - Benefits of North Sea Oil. Note by the Secretary of the Cabinet

8 - Common Fisheries Policy. Note by the Minister of Agriculture, Fisheries and Food and the Secretary of State for Scotland

9 - Special Employment Measures. Memorandum by the Secretary of State for Education and Science and Paymaster General

10 - Economic Outlook: Case for Reflation and Increase in Public Expenditure. Memorandum by the Secretary of State for Social Services and the Minister for Social Security

11 - Statement on the Defence Estimates 1978. Note by the Secretary of State for Defence

12 - The Economic Prospect and Policies. Memorandum by the Chancellor of the Exchequer

13 - Draft White Paper on the Nationalised Industries. Note by the Chancellor of the Exchequer

14 - Second Report from the Select Committee on the PCA, Session 1976-77: Government Observations. Note by the Lord Privy Seal

15 - North Sea Development Fund. Note by the Secretary of the Cabinet

16 - Benefits of North Sea Oil. Note by the Secretary of the Cabinet

17 - Developments in the European Communities. Note by the Secretary of State for Foreign and Commonwealth Affairs

18 - North Sea Oil Development Fund. Note by the Secretary of State for Energy, the Secretary of State for the Environment and the Secretary of State for Scotland CP(78) 19 - Full Employment, Competitiveness and Tax Relief. Memorandum by the Chancellor of the Duchy of Lancaster

20 - North Sea Oil White Paper. Note by the Secretary of the Cabinet

21 - Capital Punishment in the Dependent Overseas Territories. Memorandum by the Lord President of the Council

22 - Draft Government Response to the Expenditure Committee Report on the Civil Service. Note by the Lord Privy Seal

23 - Basis for preparing the 1978 Public Expenditure Survey. Memorandum by the Chief Secretary, Treasury

24 - Public Expenditure Priorities. Memorandum by the Central Policy Review Staff

25 - Pay of Nationalised Industries' Board Members and Senior Staff. Note by the Lord Privy Seal 11 January 1978

CABINET

ANNUAL REVIEW OF AGRICULTURE 1978

Note by the Minister of Agriculture, Fisheries and Food

1. Attached is a Confidential Final Revise copy of the White Paper on the Annual Review of Agriculture 1978 which is circulated for the information of my colleagues. It is proposed to lay this before Parliament on Thursday 12 January and to announce its publication by means of a Written Parliamentary Question.

2. The White Paper is a factual account of the economic situation in the industry; I will circulate separately proposals on farm prices for 1978-79.

J S

Ministry of Agriculture, Fisheries and Food

11 January 1978 AGRICULTURE ACT 1947

ANNUAL REVIEW OF AGRICULTURE 1978

## CONTENTS

| Section | Paragraphs | |----------------------------------------------|------------| | INTRODUCTION | 1-2 | | PART I—STATE OF THE INDUSTRY | 3-6 | | PART II—COMMODITY TRENDS | | | Cereals | 7 | | Oilseed Rape | 8 | | Potatoes | 9-10 | | Sugar Beet | 11-12 | | Horticulture | 13 | | Hops | 14 | | Seeds | 15-16 | | Beef and Milk | 17-21 | | Sheep and Wool | 22-24 | | Pigs | 25-26 | | Poultrymeat | 27 | | Eggs | 28 | | PART III—GENERAL DEVELOPMENTS | | | Farm structure | 29-31 | | Index of net product | 32 | | Labour productivity | 33 | | Net income of the industry | 34-37 | | Cost changes | 38 | | Gross capital formation | 39 | | Agricultural land prices | 40 | | Farm rents | 41 | | Farm workers’ earnings | 42 | | Public expenditure | 43-44 |

## APPENDIX

### Statistical tables—general note

| Table No. | Description | Page | |-----------|------------------------------------------------------------------------------|------| | 1. | Agriculture in the national economy | 12–13| | 2. | Crop areas and livestock numbers | 14–15| | 3. | Numbers and size of holdings and enterprises | 16–18| | 4. | Number of persons engaged in agriculture | 19 | | 5. | Estimated average yields of crops and livestock products | 20 | | 6. | Concentrated feedingstuffs | 20 | | 7. | Cereals supplies | 21–22| | 8. | Oilseed rape supplies | 23 | | 9. | Potato supplies | 24 | | 10. | Sugar supplies | 25 | | 11. | Supplies of certain horticultural crops | 26–27| | 12. | Hops supplies | 28 | | 13. | Supplies of herbage seeds | 28 | | 14. | Meat supplies | 29–30| | 15. | Milk production | 31 | | 16. | Milk product supplies | 32–33| | 17. | Egg supplies | 34 | | 18. | Wool supplies | 34 | | 19. | Net income, net product and labour productivity | 35 | | 20. | Average earnings and hours of agricultural workers | 35 | | 21. | Output, input and net income | 36–38| | 22. | Farm rents | 38 | | 23. | Gross capital formation | 38 | | 24. | Specimen net incomes for different types of farm | 39–40| | 25. | Public expenditure under the common agricultural policy (CAP) and on national grants and subsidies | 40–42| | 26. | Aggregate cost changes since the 1977 Annual Review | 42 | | 27. | Commodity price trends | 43–44| INTRODUCTION

1. This White Paper sets out the data considered during the Annual Review of the economic condition and prospects of the United Kingdom agricultural industry. It provides information which can be drawn on by the Government in responding to the proposals by the EEC Commission for agricultural support in 1978/79 and when decisions are taken on support arrangements which remain within our national competence. As in 1977, these decisions will be announced separately.

2. Information in the Statistical Appendix has in most cases been moved on to a calendar year basis, mainly in order to bring it into line with practice in the European Economic Community, but also to reduce the number of different years to which the information relates and the element of forecasting. In most cases the forecasts for 1977 reflect the position as seen at November 1977.

PART I—STATE OF THE INDUSTRY

3. The main feature of agricultural production in 1977 has been the dramatic recovery from the setbacks caused by the weather in the two preceding years. The index of agricultural net product, which in the drought-hit year of 1976 had fallen to 89, reached 112 in 1977—almost as high as the previous best year of 1974. This improvement was largely the result of good weather which had a particularly marked effect on the production of milk and cereals. The industry's cost increases in the period since the last Annual Review are set at £322.5 million compared with £895 million in the previous year. Agricultural net income excluding stock appreciation is expected to rise from £1,158 million in 1976 to £1,348 million in 1977. This represents little change in real terms. The volume of new fixed investment in agriculture is expected to show a reduction in 1977, especially in buildings and works.

4. There was a small increase in the size of the dairy herd in 1977 and this combined with substantially improved yields led to an increase in total sales of milk through the Milk Marketing Boards of 4.5% over 1976. Beef production is in the downward phase of the cycle; the beef breeding herd fell by a further 4% and home production of beef is expected to be 5% down on 1976. Although production of sheepmeat is expected to be 4% lower than in 1976, there are signs of an increase in the breeding flock. The pig breeding herd fell by 7% between June 1976 and June 1977 as a result of difficulties encountered in this sector but returns to producers are expected to recover in 1978. Little change is expected in the size of the egg-laying flock and the production of eggs is expected to increase marginally. Poultrymeat production is also likely to increase slightly in 1977.

5. In the arable sector the 1977 cereals crop is forecast to be some 3.7 million tonnes greater than the 13.26 million tonnes produced in 1976; most of the increase arises from higher yields. Potato plantings were higher than in 1976 and, with yields recovering from the low, drought-affected levels of 1976, supplies should be more than adequate to meet requirements. The area of sugar beet harvested in 1977 is no greater than in 1976 but yields have recovered from the low levels of the last three years and production of white sugar is forecast to amount to nearly 1 million tonnes. The area sown to oilseed rape has continued to expand and yields have improved over the last few years. There was a further slight fall in 1977 in the area of certified herbage seed.

6. The value of horticultural output continued to increase, despite the reductions in yields of vegetables in the first half of the year and losses of orchard and soft fruit, which were more than offset by higher prices. The review of the horticultural industry which was carried out by the Government and the Farmers' Unions early in 1977 forecast a brighter future for the industry than was generally thought possible five years ago. Increased efficiency and the protective effect of the depreciation of sterling have been important factors contributing to the profitability of horticulture.

PART II—COMMODITY TRENDS

Cereals (Tables 2, 5, 7 and 27)

7. The area of cereals harvested in 1977 was 3.71 million hectares, slightly above the 3.68 million hectares in the previous year. Production is expected to total nearly 17 million tonnes, some 3.7 million tonnes above the 13.26 million tonnes in 1976. The wet autumn of 1976 led to a decrease in the area sown to wheat which was largely offset by an increase in the barley area. The harvest was delayed by a cold, wet spring but the favourable growing conditions in the summer led to exceptionally high yields, particularly in comparison with 1976 when yields were unusually low because of drought. In the south, rain in mid-August reduced the quality of the crops, especially wheat, to well below average. Market prices, which rose rapidly in the autumn of 1976, continued to rise during the first half of 1977 to around threshold levels. Following the harvest, while breadmaking wheat and malting barley remained at a premium, the prices for feed grains fell to near intervention levels. Owing to ideal conditions this autumn the sowing of winter cereals is well advanced.

Oilseed rape (Tables 2, 5, 8 and 27)

8. Production of oilseed rape in 1977 again reached a new record level owing partly to a slight improvement in yields but largely to the increased area sown to the crop. Prices towards the end of the 1976/77 marketing year were good but have since fallen following the announcement of a record soya crop in the USA with which rapeseed is in direct competition on the world market.

Potatoes (Tables 2, 5, 9 and 27)

09. In 1977 the target area of 210,000 hectares was exceeded by some 20,000 hectares but the yield was at a lower level than would normally have been expected, and depending on the extent to which consumption levels return to normal, a small surplus can be expected. In view of low producer prices at the beginning of the season, the Potato Marketing Board, with Exchequer assistance, undertook a market support programme in the autumn with the purpose of influencing market prices, so that the average for the season would achieve the guaranteed price of £45.77 per tonne.
10. Proposals for an EEC regime for potatoes have continued to be discussed, but it is not certain that agreement can be reached in time for common arrangements to apply to the 1978 crop. Consideration is currently being given to the appropriate form of marketing and support arrangements for that crop in the absence of a common regime.

Sugar beet (Tables 2, 5, 10 and 27)

11. For 1977 the British Sugar Corporation contracted to purchase the beet from 206,000 hectares. Some 201,000 hectares are expected to be harvested, about the same as in 1976. Weather during the growing season was generally good, yields of beet per hectare are slightly up and sugar content is showing a substantial improvement on last year. Assuming that harvesting and processing proceed as planned, the crop should yield between 900,000 and 1 million tonnes of white sugar.

12. Contracts for 1978 have not yet been completed but the Corporation aims to increase its contracted area.

Horticulture (Tables 2, 5, 11 and 27)

13. The area devoted to horticulture was 289,000 hectares at June 1976 and the provisional figure for 1977 shows no change in the total area. Details are given for the four commodities grown in the UK which are affected by Community intervention arrangements in the fruit and vegetables sector.

(a) Apples. The area of apple orchards (excluding cider apples) continues to decline slowly and in 1977 is estimated at 31,600 hectares. Production capacity, however, has changed very little because of more intensive new orchard planting. The long-term effects of the 1976 drought combined with this year's cold spring led to reduced yields in 1977. Supplies from major apple-exporting countries were also lower than usual. Prices in the UK have consequently been much higher than in 1976.

(b) Pears. The area under pears (excluding perry pears) has changed very little in recent years and is estimated at 5,200 hectares in 1977. This year's crop is slightly below average and substantially below the high level of 1976. Prices are likely to be higher than in 1976, because of both the lighter pear crop and the higher apple prices.

(c) Cauliflowers. The area under cauliflowers continues to decline from the peak in the late 1960s and is estimated to be 14,000 hectares in 1977. The cold, wet weather in late 1976 and early 1977 reduced production of winter cauliflowers but better weather later in the year resulted in an overall increase in output in 1977 compared with 1976. Prices remained high until the late summer of 1977 and the sharp drop since then is not likely to be sufficient to reduce the average price for 1977 below that for 1976.

(d) Tomatoes. About 950 hectares of glasshouse area were used for tomato production in 1977. This figure has remained fairly constant for some years. Poor light conditions reduced yields in 1977 and output is slightly down on the high levels of 1976. Prices are expected to be significantly higher than last year.

Hops (Tables 2, 5, 12 and 27)

14. The area under hops remained stable in 1977 at about 6,000 hectares. There has been a gradual long-term decline in area resulting from the improved utilisation of hops by brewers and increased yields from new varieties. The cold, wet weather early in the year reduced yields to well below those in 1976, which were themselves adversely affected by the drought. Prices for hops in 1977 are similar to those in 1976.

Seeds (Table 13)

15. The area of certified herbage seed which had fallen substantially in both 1975 and 1976 showed only a very slight further fall (1%) in 1977. Yields in general are good with mainly firm prices which are showing an increase on 1976 levels. A notable exception is Italian Ryegrass where increased production has resulted in depressed prices. Home production of herbage seed normally meets 55% of total requirements but abnormal weather conditions resulted in increased imports.

16. The area of certified field bean seed is down by 15% in 1977 but is still excessive in the light of the demand for certified seed for cropping. The expansion of the area sown for the production of certified field pea seed—although small—continues at a high rate and the sharp upward trend is expected to continue. The area of certified seed of linseed rose sharply in 1976 but fell back again in 1977 almost to 1975 levels.

Beef and Milk (Tables 2, 5, 14, 15, 16 and 27)

17. The 1977 June census for the UK showed a levelling out of the decline in the total breeding herd. Numbers were only marginally lower than in June 1976; the dairy herd—about 66% of all breeding cows—showed an increase of 1% but the beef herd was 4% smaller. In England and Wales the September sample census indicated a fall of 1% in the total herd compared with the previous year, due entirely to a further decline in the beef breeding herd.

18. Home production of beef in 1977 is expected to be about 5% less than in 1976, but this decline has been balanced by an increase in imports and decrease in exports in trade with other EEC countries so that total supplies available for consumption are likely to be about the same as in 1976. Average market prices for certified cattle in the UK remained above the weekly target prices until the end of July 1977, reaching a peak of 63.17p per live kg in mid-June. Thereafter, variable premiums were payable in most weeks as market prices underwent a seasonal decline into the autumn. Throughout this period the market was underpinned by a moderate amount of intervention.

19. The average milk yield per cow in 1977 is expected to show an improvement of 3.5% on the 1976 level while the average size of the national dairy herd is expected to increase by about 1% over the previous year. As a result, milk production in 1977 is expected to show an increase of about 4.5% over that for 1976. The amount of milk sold for liquid consumption in 1977 is expected to be lower than in 1976, whilst the availability of milk for manufacture increases appreciably. Cheese production in 1977 is expected to increase slightly over the previous year’s level and butter production is forecast to increase substantially over the 1976 level. Increases in the guaranteed price for milk and the standard quantity at the 1977 Annual Review led to an increase of almost 6% in the guaranteed price for milk for the period 1 April to 31 December.

20. As required by the Treaty of Accession the guaranteed price arrangements for milk producers ended on 31 December 1977 and producer returns from 1 January 1978 depend on the returns the Milk Marketing Boards obtain from the liquid and manufacturing milk markets.

21. The average size of the national dairy herd in 1978 is expected to decline slightly, so that any improvement in milk production in 1978 will depend on whether yields continue to improve.

Sheep and Wool (Tables 2, 14, 18 and 27)

22. Between June 1976 and June 1977 there was a small increase (0.2%) in the total UK breeding flock, the increase in the number of shearling ewes more than compensating for the drop in older ewe numbers. Although the lamb crop was just over 2% smaller than the record crop of 1976, with fewer slaughterings in 1977 the breeding flock is expected to increase in 1978.

23. UK home production of sheepmeat is expected to be about 4% lower in 1977 than in 1976, while at the same time imports are expected to drop by 3.5% and exports to increase by 16%, resulting in a drop in available supplies to the UK home market of just over 5%. In 1977 prices for fat sheep have been above the guarantee, except for 6 weeks between June and August, averaging about 20% above last year’s levels. Prices paid for store lambs and hill ewes have again risen well above those paid the previous year.

24. Production of wool in 1977 again declined very marginally. Prices were especially strong in 1976 owing to the fall in the value of sterling and rose to reach a peak of 126p per kg in February 1977. UK prices then declined by 15-20% in line with a general weakening of world markets. On average, auction prices for the 1977 clip are expected to be below the guarantee but producers’ returns will be made good from the stabilising fund built up during last season’s high-priced sales.

Pigs (Tables 2, 14 and 27)

25. The decline in profitability which began in 1976 continued into 1977 and led to a fall of 7% in the pig breeding herd between June 1976 and June 1977. This is being reflected in lower supplies of pigmeat and production in 1978 is expected to be lower than in 1977.

26. The resulting increase in pig prices together with a reduction in feed costs from the highest levels of 1976/77 may encourage some modest expansion in the breeding herd during 1978. Poultrymeat (Tables 2, 14 and 27)

27. Output of poultrymeat is expected to show a small increase in 1977. Turkey prices have increased but other poultry prices remained generally steady over the year.

Eggs (Tables 2, 5, 17 and 27)

28. Both the annual average size of the laying flock and output are expected to show a small increase in 1977 and higher yields per bird may be reflected in a further marginal increase in production in 1978. Egg prices have fluctuated but over the year as a whole average producer prices are expected to be higher than in 1976.

PART III—GENERAL DEVELOPMENTS

Farm structure (Table 3)

29. The number of farms in the UK continues to decline. Because the standard labour requirements for crops and livestock have been revised in line with current labour usage, comparative figures of holdings by size of business are not available for years before 1975. In 1977 the total number of holdings was 261,000, that is 3% lower than in 1975. Among relatively small changes over this period, the percentage fall in numbers has been most marked among the smaller full-time businesses. Just over 50% of holdings have businesses capable of providing work for at least one man (now defined as those of 250 revised standard man-days or more) but these account for 90% of total output (though in Northern Ireland and Wales the output of part-time farms is rather more significant than in other parts of the UK), while large businesses (1,000 standard man-days or more), though only about 10% of the total number, produce about a half of total output.

30. The average size of farms is increasing. Full-time businesses averaged 113 hectares (total area including rough grazings) in 1977 compared with 111 hectares in 1975. The trend to greater specialisation continues with the number of enterprises (eg dairy herds) declining and their average size increasing. Between 1975 and 1977 the average area of cereals has increased from 30 to 32 hectares; the average dairy herd has risen from 40 to 44 cows though the average beef breeding herd at 18 cows may have declined slightly; the average ewe flock has increased from 164 to 167 breeding sheep and the average pig breeding herd rose from 23 to 25 sows.

31. In Great Britain 62% of the holdings were wholly or mainly owner-occupied in 1977 compared with 54% in 1960/61. The proportion of the total area held by owner-occupiers has increased from 52% in 1960/61 to 57% in 1977. In Northern Ireland virtually all farmers are owner-occupiers.

Index of net product (Table 19)

32. With the change to calendar year accounts, the index has been re-based on 1975=100. It fell to 89 in 1976 because of the drought in that year and the continuing effects of the dry weather of 1975. In 1977, however, it is expected to have recovered to 112—almost back to the average 1972–74 level—as a result of the record cereals harvest, the more normal potato crop and increased milk yields.

**Labour productivity (Tables 4 and 19)**

33. The adverse weather in 1975 and 1976 reduced the volume of output and this is reflected in reduced labour productivity (the volume of gross product per person engaged) for these two years but a substantial recovery to a record level is forecast for 1977. Over the past ten years labour productivity has increased at nearly 4% per annum, only a little below the average of 4% to 5% per annum in the late 1960s and early 1970s. The outflow of regular whole-time workers has continued. In 1976 and 1977 the rate was just over 3½% per annum respectively compared with 5% to 6% per annum in the 1960s.

**Net income of the industry (Tables 19, 21 and 24)**

34. Excluding stock appreciation, aggregate net income, which increased by 25% to £1,158 million in 1976, is expected to show a further increase of 16% to £1,348 million in 1977. In real terms the increase between 1975 and 1976 was 7% and little change is likely in 1977. When stock appreciation is included, aggregate net income increased by 28% to £1,835 million in 1976 and is expected to have fallen by 2% to £1,796 million in 1977. In real terms a 10% increase between 1975 and 1976 is expected to be followed by a fall of 15-5% in 1977.

35. The other main series of farm incomes data examined at the Annual Review is based on samples of full time accounts. They show the impact of the drought and other factors on net income per farm in 1976/77 in the different sectors and regions of the UK. The accounts end on average in February and this year net income excludes stock appreciation of breeding livestock. For this and other reasons the farm accounts results show different changes in income from the aggregate series. Average net income of all types (excluding horticulture) went up in 1976/77 in all countries but at a much lower rate than in the previous year. In England income rose by 4%, in Wales by 28%, in Scotland by 10% and in Northern Ireland by 21%. Higher prices for most crops more than compensated in England and Wales for lower yields caused by the drought and the value of crop output rose by nearly a quarter. The value of output of most livestock was also up, particularly of sheep. Feed prices rose sharply and in England and Wales the poor growth of grass and fodder crops during the drought led to heavier feed bills.

36. On dairy farms higher milk prices and larger herds contributed to increases in income, although in England the rise was less than elsewhere with the drought reducing milk yields and pushing up feed purchases. Sheep farms achieved the largest increase in income. Cattle farms generally had better incomes but for some cattle fatteners income was reduced by heavier feed bills and smaller margins between store and fat prices. Higher prices for many crops contributed to larger incomes on cropping farms in most regions, although in Scotland the increase over the record level of 1975/76 was small. The sharp rise in feed prices and only a small increase in output of pigs and poultry reduced incomes on farms with substantial pig and poultry enterprises, except in Northern Ireland. In real terms income fell in England and also in Scotland where it had reached a record level in 1975/76. In Wales and in Northern Ireland there was a further but much smaller increase.

37. Forecasts of trends in 1977/78 indicate a small rise in average income in England and Wales and Northern Ireland but a fall in Scotland. The record cereals harvest is expected to offset lower prices and the value of cereals output in England and Wales should rise. But the sharp drop in prices will reduce the value of potato output, particularly in areas which had good crops in the previous year. Lower feed prices and, in England and Wales, more plentiful supplies this year of home grown cereals, grass and fodder crops will generally reduce feed bills and benefit incomes of livestock producers. Milk yields have recovered in England and Wales and with generally higher prices for calves and cull cows, dairy incomes should go up in most areas of the UK. Prices for both fat and store sheep have generally been buoyant and a further rise in income is likely on sheep farms. Suckled calf prices were mostly lower than last year’s high levels at the autumn sales and the increase in fat cattle prices has not been sufficient to offset higher costs: incomes of many cattle enterprises may therefore drop, despite lower feed prices and in Great Britain more plentiful fodder. With substantially lower potato revenue, incomes on many general cropping and mixed farms are likely to decline, particularly in Scotland and Northern Ireland which had benefited most from the high potato prices in the previous two years, but higher cereal yields in England and Wales are likely to lead to an increase on specialist cereal farms there. A good recovery in incomes on pig and poultry holdings is expected. In real terms average incomes in 1977/78 are forecast to fall, particularly in Scotland.

Cost changes (Table 26)

38. Net cost increases since 1976 are assessed at about £322.5 million for all products. The main increases are for machinery depreciation (£127 million), labour (£112 million), miscellaneous expenditure (£58 million) and fertilisers and lime (£49 million). There are estimated reductions in the costs of animal feedingstuffs (£62 million), interest (£58 million) and seeds (£25 million).

Gross capital formation (Table 23)

39. It is estimated that there will be a further increase in the value of new investment in 1977. Total gross capital formation in landlord and tenant-type physical assets together is estimated to be £1,596 million in 1977; of this £614 million is estimated to be in plant, machinery and vehicles, ie a rise of 23% over the amount invested in 1976, and £724 million in additions to stocks and work-in-progress. New investment in buildings and works (landlord-type assets) is expected to amount to £258 million. In volume terms new investment in 1977 in plant, machinery and vehicles is expected to be between 1% and 2% lower than in 1976. The volume of investment in buildings and works has continued the downward trend begun in 1973 and in 1977 was 5% lower than in 1976. The physical level of stocks and work-in-progress in 1977 is expected to be higher than in 1976 reflecting larger stocks of harvested crops including fodder. Despite the improvements in conditions, coverage and rates of grants from 1 June 1976, the number of applications estimated for 1977 under the Farm Capital Grants Schemes is likely to be 11% below the number received in 1976. Most of this work would be for completion in 1978 and later years. Under the Farm and Horticulture Development Scheme, however, initial eligibility applications rose sharply after the June changes and nearly 7,000 plans are estimated to be approved in 1977 compared with 479 in 1975 and 1,953 in 1976. Investment under the Scheme takes place in the framework of development plans which can vary in length from one to six years.

Agricultural land prices

40. The average price for all sales of agricultural land of 4 hectares and over in England and Wales, as reported to the Inland Revenue, was £1,295 per hectare for the six-month period ended September 1977. This compares with a price of £1,287 per hectare for the period ended March 1977 and £1,086 per hectare for the period ended September 1976. Because of the delay between a sale being agreed and its notification to the Inland Revenue, this series is subject to a time lag of several months. More up-to-date information from the ADAS/AMC series, which is less comprehensive and relates only to vacant possession sales, indicated that there was a substantial increase in prices in the middle of 1977. The average price of vacant possession land in the three-month period ended September 1977, shown by this series, was £2,406 per hectare. There have also been significant increases in agricultural land prices in Scotland and Northern Ireland.

Farm rents (Table 22)

41. Farm rents in the UK are estimated to have increased by an average of 15.9% in 1977. This estimate is based on the provisional results of the annual ADAS Rent Enquiry in England and Wales and on field enquiries in Scotland. This increase compares with increases of 19.3% in 1976, 16.8% in 1975 and 8.7% in 1974.

Farm workers' earnings (Table 20)

42. In the calendar year 1976 the average earnings of whole-time hired men in the UK were £50.27 per week, including the £6 increases in minimum rates awarded in the winter of 1975/76. Compared with 1975 this is a rise of 17% in money terms and of 0.5% in real terms. In 1977 average whole-time earnings are forecast at about £54 per week, a rise of 7.5% in money terms but a reduction in real terms.

Public expenditure (Table 25)

43. In 1977/78 the estimated outturn for expenditure in the UK on price guarantees, grants and subsidies (excluding the brucellosis incentives and payments connected with the milk subsidy) is about £204 million. The comparable figure for 1976/77 is about £207 million. Expenditure on hill livestock compensatory allowances is expected to be lower than in 1976/77, when the outturn was inflated by payments carried over from 1975/76. This decrease is expected to be partly offset by payments under the capital grant schemes and the new Milk Non-Marketing and Conversion Premium Scheme.
44. Expenditure under the common market organisation of the EEC is estimated to increase by some £33 million to about £204 million in 1977/78 compared with expenditure of £171 million in 1976/77. This expenditure by the Intervention Board for Agricultural Produce includes the Beef Variable Premium Scheme, import and export refunds, certain production subsidies, the gross cost of aids to private storage and the net cost of commodities bought into intervention and subsequently sold. Some of this expenditure benefits consumers and overseas exporting interests rather than producers. The additional expenditure in 1977/78 is mainly due to increased purchases into intervention of skimmed milk powder and butter. Whilst these and other variations account for an increase of some £61 million this has been partly offset by a reduction of about £28 million in the net cost of import and export refunds. APPENDIX

STATISTICAL TABLES

The tables cover largely the same ground as those in last year's White Paper except that Table 27 on Commodity Price Trends has been simplified. Two changes in presentation have, however, been made; the columns showing equivalents in imperial units no longer appear and, with the exceptions of tables relating to fixed dates and those on Herbage Seeds (Table 13), Specimen Net Incomes (Table 24) and Public Expenditure (Table 25), information is now shown on a calendar year basis. Forecasts, which are as at November 1977 unless otherwise indicated, generally refer to the position up to the end of 1977. For some commodities the move to a calendar year basis has involved the introduction of stock figures into the supply tables. Calendar year figures are not available before 1967 and the three-year averages are therefore given for the period 1967 to 1969. New base years have been introduced for some of the indices in Tables 1, 19 and 22.

Even where there has been no change in the basis of the tables, some of the figures in this Appendix differ from those in previous Annual Review White Papers because of later information, changes in the scope and nature of available data and improvements in statistical methods.

All figures relate to the United Kingdom, unless otherwise stated.

Figures for imports from and exports to the Eight relate throughout to the countries of the enlarged European Economic Community (Belgium, Denmark, France, West Germany, the Irish Republic, Italy, Luxembourg and the Netherlands).

Significant items of Channel Islands trade are shown separately in the tables.

Figures for exports include re-exports.

In some cases figures may not add to the totals shown because of roundings.

Symbols:

— means "nil"

... means "negligible" (less than half the last digit shown)

.. means "not available" or "not applicable".

### Table 1

**Agriculture in the national economy**

| Calendar years | Average of 1967–69 | 1973 | 1974 | 1975 | 1976 | 1977 (provisional) | |----------------|---------------------|------|------|------|------|-------------------| | **Agriculture’s contribution to gross domestic product (a)** | £ million | percentage | £ million | percentage | £ million | percentage | £ million | percentage | £ million | percentage | £ million | percentage | | Agriculture’s share of gross fixed capital formation (b) | £ million | percentage | 219 | 2-7 | 441 | 3-1 | 559 | 3-3 | 613 | 3-0 | 726 | 3-1 | | Manpower engaged in agriculture (c) ('000) | 808 | 704 | 678 | 662 | 669 | 661 | | Percentage of total manpower in all occupations | 3-3 | 2-9 | 2-7 | 2-7 | 2-7 | 2-7 | | **Agricultural price index (1970 = 100)** | All products—sales (e)(f) | 92-8 | 146-9 | 166-0 | 205-7 | 264-6 | 272-5 | | Inputs—selected indicators (f) | Feedingstuffs (g) | 89-5 | 160-8 | 209-2 | 207-5 | 257-5 | 304-5 | | Fertilisers (excl. lime) (h) | 98-4 | 127-2 | 177-6 | 211-4 | 226-7 | 260-5 | | Fuel (i) | 94-5 | 122-5 | 178-6 | 215-9 | 265-7 | 320-0 | | Labour | 84-6 | 150-2 | 194-7 | 245-4 | 292-7 | 317-7 | | Machinery (j) | 88-4 | 131-0 | 159-0 | 200-4 | 235-3 | 291-5 | | Imports of food, feed & alcoholic beverages (k) | £ million | 1,881 | 3,205 | 3,990 | 4,480 | 5,215 | (Jan.–Sept. only) 4,854 | | Import volume index (1970 = 100) | 100-4 | 102-9 | 97-4 | 96-9 | 102-2 | 105-0 | | Import price index (1970 = 100) | 89-1 | 151-2 | 200-9 | 223-8 | 248-4 | 301-3 | | Exports of food, feed & alcoholic beverages (k) | £ million | 399 | 853 | 1,048 | 1,366 | 1,620 | (Jan.–Sept. only) 1,508 | | Export volume index (1970 = 100) | 87-2 | 137-3 | 143-8 | 155-4 | 156-0 | 162-4 | | Export price index (1970 = 100) | 93-0 | 126-2 | 150-8 | 178-3 | 212-6 | 253-9 | | Consumers’ expenditure on food and alcoholic beverages (l) | £ million | 8,427 | 13,122 | 15,191 | 18,729 | 22,182 | (prov.) 11,650 | | Percentage of total consumers’ expenditure | 30-8 | 29-0 | 29-2 | 29-5 | 30-1 | 29-7 | | Retail price index (January 1970 = 100) | Food (f)(m) | 92-3 | 144-7 | 170-7 | 214-5 | 257-2 | 304-5 | | Alcoholic beverages (f) (m) | 90-6 | 144-8 | 127-3 | 156-9 | 184-9 | 211-0 | | All items (f)(m) | 92-6 | 132-4 | 153-7 | 190-8 | 222-4 | 255-1 | TABLE 1 (Continued)

(a) Excluding appreciation in value of work-in-progress and stocks. (b) All fixed assets (excluding work-in-progress and stocks). (c) Total manpower engaged in agriculture between 1973 and 1977 comprises the numbers of self-employed, employers and employees in employment, (excluding farmers' spouses) given in the June censuses conducted by the Agricultural Departments of England and Wales, Scotland and Northern Ireland. The average figures for 1967 to 1969 are based on the Department of Employment series of the count of national insurance cards and the population census, adjusted by the ratio in 1971 of this series to the Agricultural Departments' series. (d) See footnote (e) to Table 4. (e) Based on prices after addition of subsidy or grant, where payable. (f) Annual averages. (g) Based on representative prices for compound and straight feedingstuffs. (h) Department of Industry's Wholesale Price Index—excluding Value Added Tax. (i) Department of Energy's Indices and Department of Industry's Wholesale Price Indices—excluding Value Added Tax. (j) Department of Industry's Wholesale Price Index—excluding Value Added Tax. (k) Includes oilseeds and nuts, animal oils and fats, citric acid, food dyes, essences, starches, edible gelatin, albumen and casings. (l) Includes caterers' expenditure on food. (m) Source: Department of Employment.

| Year | Value 1 | Value 2 | Value 3 | Value 4 | Value 5 | Value 6 | Value 7 | Value 8 | Value 9 | Value 10 | |------|---------|---------|---------|---------|---------|---------|---------|---------|---------|---------| | 1973 | | | | | | | | | | | | 1974 | | | | | | | | | | | | 1975 | | | | | | | | | | | | 1976 | | | | | | | | | | | | 1977 | | | | | | | | | | |

Source: Department of Employment.

### Table 2

**Crop areas and livestock numbers (a)**

At June of each year

| | Average 1967-69 | 1973 | 1974 | 1975 | 1976 | 1977 (provisional) | |------------------------|-----------------|------|------|------|------|-------------------| | **A. Crop areas ('000 hectares)** | | | | | | | | Total area | 19,515 | 18,988 | 19,010 | 18,978 | 18,987 | 18,899 | | of which: | | | | | | | | Wheat | 915 | 1,146 | 1,233 | 1,034 | 1,231 | 1,072 | | Barley | 2,418 | 2,267 | 2,214 | 2,345 | 2,182 | 2,412 | | Oats | 391 | 281 | 233 | 232 | 235 | 193 | | Mixed corn | 48 | 51 | 42 | 35 | 28 | 24 | | Rye | 4 | 5 | 5 | 6 | 8 | 11 | | Maize | | 1 | 1 | 1 | 1 | 1 | | Total cereals (b) | 3,776 | 3,752 | 3,747 | 3,653 | 3,685 | 3,713 | | Potatoes | 272 | 225 | 215 | 204 | 222 | 230 | | Sugar beet | 186 | 194 | 195 | 198 | 206 | 202 | | Oilseed rape | | 14 | 25 | 39 | 48 | 55 | | Hops | 7 | 7 | 7 | 6 | 6 | 6 | | Vegetables grown in the open | 176 | 187 | 194 | 198 | 206 | 209 | | Orchard fruit | 71 | 57 | 55 | 53 | 52 | 50 | | Soft fruit (c) | 18 | 18 | 18 | 17 | 17 | 16 | | Ornamentals (d) | 14 | 16 | 16 | 15 | 14 | 12 | | Total horticulture (e) | 280 | 281 | 285 | 285 | 289 | 289 | | Total tillage (f) | 4,981 | 4,818 | 4,838 | 4,816 | 4,821 | 4,853 | | All grasses under five years old (g) (h) | 2,372 | 2,346 | 2,316 | 2,138 | 2,154 | 2,137 | | Total arable | 7,353 | 7,164 | 7,154 | 6,954 | 6,975 | 6,990 | | All grasses five years old and over (i) | 4,974 | 4,914 | 4,920 | 5,074 | 5,081 | 5,050 | | Rough grazing (j) | 7,115 | 6,605 | 6,564 | 6,555 | 6,513 | 6,409 | | Other land (k) | | 305 | 372 | 395 | 419 | 450 | | **B. Livestock numbers ('000 head)** | | | | | | | | Total cattle and calves | 12,289 | 14,445 | 15,203 | 14,717 | 14,069 | 13,899 | | of which: | | | | | | | | Dairy cows | 3,238 | 3,436 | 3,394 | 3,242 | 3,228 | 3,264 | | Beef cows | 1,168 | 1,678 | 1,887 | 1,899 | 1,764 | 1,694 | | Heifers in calf | 821 | 988 | 1,041 | 903 | 939 | 830 | | Total sheep and lambs | 27,831 | 27,943 | 28,498 | 28,270 | 28,265 | 28,030 | | of which: | | | | | | | | Ewes | 11,374 | 10,921 | 11,192 | 11,279 | 11,298 | 11,198 | | Shearlings | 2,429 | 2,733 | 2,673 | 2,471 | 2,369 | 2,499 | | Total pigs | 7,425 | 8,979 | 8,544 | 7,532 | 7,947 | 7,665 | | of which: | | | | | | | | Sows in pig and other sows for breeding | 732 | 859 | 783 | 710 | 747 | 720 | | Gilts in pig | 143 | 156 | 107 | 104 | 137 | 100 | | Total poultry | 126,532 | 144,079 | 139,672 | 136,572 | 142,222 | 137,434 | | of which: | | | | | | | | Table fowls (incl. broilers) | 38,971 | 58,366 | 56,701 | 56,708 | 61,325 | 57,725 | | Laying fowls | 52,478 | 51,766 | 49,924 | 49,359 | 49,085 | 48,824 | | Growing pullets | 22,572 | 18,808 | 18,958 | 18,195 | 18,383 | 17,503 | The coverage for 1973 and onwards includes all known holdings in the United Kingdom with 40 standard man-days or more (a standard man-day (smd) represents 8 hours' productive work by an adult male worker under average conditions). All holdings with less than 40 smd in Scotland are excluded. In England and Wales and Northern Ireland holdings with less than 40 smd are excluded only if they have less than 4 hectares (10 acres) of crops and grass and no regular whole-time worker. The same criteria applied in Great Britain in the years 1970 to 1972, except that the threshold for standard labour requirements in those years was 26 smd.

The 1967-69 figures related to all known agricultural holdings exceeding one acre (0.4 hectares) in extent. The figures for Northern Ireland for these years related to holdings of one acre (0.4 hectares) or more, except for numbers of livestock, which were collected from all owners, irrespective of the size of the holding, as well as from landless stockholders.

The introduction of the changes of definition in Northern Ireland in 1973, following similar changes in Great Britain which excluded some 14,000 statistically insignificant holdings in 1970 and about 8,000 in 1973, had the net result of eliminating about 6,000 or so holdings from the Northern Ireland census.

For threshing.

Includes small area of soft fruit grown under orchard trees in England and Wales.

Hardy nursery stock, bulbs and flowers.

Most of the difference between total horticultural area and the sum of individual sectors is made up by the glasshouse area.

Includes areas of other crops and bare fallow not shown in the table.

Includes lucerne.

Before 1975 collected as:

- in England and Wales—"clover, sainfoin and temporary grasses";
- in Scotland—"grass under seven years old";
- in Northern Ireland—"1st, 2nd and 3rd year".

Before 1975 collected as:

- in England and Wales—"permanent grass";
- in Scotland—"grass seven years old and over";
- in Northern Ireland—"4th year or older".

Includes common rough grazings.

Returns of "other land" were collected for the first time in England and Wales in June 1969. From June 1969 to June 1973 "other land" in Great Britain was collected as woodland and areas under roads, yards, buildings, of which was ancillary to the farming of the land; in Northern Ireland it included land within agricultural holdings which was under bog, water, roads, buildings, etc., and waste land not used for agriculture. In June 1974 the definition was changed in England and Wales to include all other land forming part of the holding and in Scotland it was extended to include ponds and derelict land. The Northern Ireland definition is unchanged.

### Table 3

**Numbers and size of holdings and enterprises (a)**

At June of each year

| Crops and grass area | 1975 | 1977 (provisional) | |----------------------|------|---------------------| | Number of holdings ('000) with | | | | 0-1 to 19-9 hectares | 119-9 | 112-0 | | 20 to 49-9 hectares | 73-2 | 71-4 | | 50 to 99-9 hectares | 41-7 | 41-5 | | 100 hectares and over | 29-3 | 29-4 | | Total | 264-1 | 254-3 | | Average crops and grass area per holding (hectares) (b) | | | | 0-1 to 19-9 hectares | 45-2 | 46-9 | | 100 hectares and over | 8-2% | 7-7% | | Per cent of total crops and grass area on holdings with | | | | 0-1 to 19-9 hectares | 47-4% | 48-5% | | 100 hectares and over | | |

| Size of business (smd) (c) (d) | 1975 | 1977 (provisional) | |-----------------------------|------|---------------------| | Number of holdings ('000) with | | | | Under 250 smd | 138-0 | 133-3 | | 250 to 499 smd | 56-4 | 53-3 | | 500 to 999 smd | 45-8 | 45-0 | | 1,000 smd and over | 28-3 | 28-9 | | Total | 268-6 | 260-6 | | Holdings 250 smd and over | | | | Average size of business (smd) | 857 | 891 | | Average total area per holding (hectares) | 111-3 | 113-2 | | Contribution to total output (%) | 90-2% | 90-8% |

| Total cereals | 1975 | 1977 (provisional) | |----------------|------|---------------------| | Number of holdings ('000) with | | | | 0-1 to 19-9 hectares | 77-6 | 71-3 | | 20 to 49-9 hectares | 22-7 | 22-5 | | 50 hectares and over | 21-0 | 21-3 | | Total | 121-3 | 115-1 | | Average area (hectares) | 30-1 | 32-3 | | Per cent of total cereals area on holdings with 50 hectares and over of cereals | 65-9% | 67-2% |

| Potatoes | 1975 | 1977 (provisional) | |-----------|------|---------------------| | Number of holdings ('000) with | | | | 0-1 to 9-9 hectares | 50-4 | 55-9 | | 10 to 19-9 hectares | 3-7 | 4-0 | | 20 hectares and over | 1-9 | 2-2 | | Total | 56-0 | 62-2 | | Average area (hectares) | 3-6 | 3-7 | | Per cent of total potato area on holdings with 20 hectares and over of potatoes | 33-6% | 34-5% | | At June of each year | 1975 | 1977 (provisional) | |----------------------|------|-------------------| | **Sugar beet (e)** | | | | Number of holdings ('000) with | | | | 0-1 to 9-9 hectares | 9-7 | 8-5 | | 10 to 19-9 hectares | 3-2 | 3-1 | | 20 hectares and over | 2-8 | 3-0 | | Total | 15-7 | 14-6 | | Average area (hectares) | | | | Per cent of total sugar beet area on holdings with 20 hectares and over of sugar beet | 55-9% | 59-6% | | **Dairy cows** | | | | Number of holdings ('000) with | | | | 1 to 29 | 39-9 | 33-1 | | 30 to 59 | 23-4 | 22-2 | | 60 and over | 17-6 | 18-7 | | Total | 81-0 | 74-0 | | Average size of herd | | | | Per cent of total dairy cows in herds of 60 and over | 53-3% | 57-3% | | **Beef cows** | | | | Number of holdings ('000) with | | | | 1 to 19 | 72-5 | 66-4 | | 20 to 49 | 20-8 | 18-5 | | 50 and over | 9-1 | 8-2 | | Total | 102-4| 93-1 | | Average size of herd | | | | Per cent of total beef cows in herds of 50 and over | 19 | 18 | | Breeding sheep (f) | | | | Number of holdings ('000) with | | | | 1 to 99 | 45-3 | 44-0 | | 100 to 499 | 29-8 | 28-9 | | 500 and over | 5-6 | 5-7 | | Total | 80-7 | 78-6 | | Average size of flock | | | | Per cent of breeding sheep in flocks of 500 and over | 164 | 167 | | Breeding pigs | | | | Number of holdings ('000) with | | | | 1 to 19 | 26-2 | 23-2 | | 20 to 49 | 5-0 | 4-7 | | 50 and over | 4-4 | 4-5 | | Total | 35-6 | 32-3 | | Average size of herd | | | | Per cent of total breeding pigs in herds of 50 and over | 23 | 25 | | Fattening pigs (g) | | | | Number of holdings ('000) with | | | | 1 to 199 | 22-7 | 19-8 | | 200 to 999 | 4-7 | 4-5 | | 1,000 and over | 0-8 | 0-9 | | Total | 28-2 | 25-2 | | Average size of herd | | | | Per cent of total fattening pigs in herds of 1,000 and over | 156 | 178 | | | 33-5% | 37-5% |

### Table 3 (Continued)

**Numbers and size of holdings and enterprises (a)**

At June of each year

| Laying fowls | 1975 | 1977 (provisional) | |--------------|------|-------------------| | Number of holdings ('000) with | | | | 1 to 4,999 | 82-0 | 73-3 | | 5,000 to 19,999 | 1-6 | 1-5 | | 20,000 and over | 0-4 | 0-5 | | Total | 84-1 | 75-3 | | Average size of flock | 587 | 648 | | Per cent of total laying fowls in flocks of 20,000 and over | 47-1% | 53-4% |

| Broilers (b) | 1975 | 1977 | |--------------|------|------| | Number of holdings ('000) with | | | | 1 to 9,999 | 1-7 | 1-7 | | 10,000 to 99,999 | 0-6 | 0-7 | | 100,000 and over | 0-1 | 0-1 | | Total | 2-4 | 2-4 | | Average size of flock | 23,403 | 23,437 | | Per cent of total broilers in flocks of 100,000 and over | 59-9% | 56-7% |

(a) Because of the revisions to size groups following metrication, and the revision of smd values in 1976, it is no longer possible to give comparative data for a span of five years. Although the figures quoted for 1975 and 1977 are strictly comparable, great caution must be exercised in comparing them with figures quoted in earlier Annual Review White Papers. The figures included for Northern Ireland in the first two sections for both years relate only to holdings with 50 smd or more.

(b) The average size of holding based on total area was—

1975 66-1 hectares of which 45-2 hectares were crops and grass 1977 67-4 hectares of which 46-9 hectares were crops and grass

(c) These figures include holdings with no crops and grass area which are excluded from the first section of the table.

(d) Revised standard man day groups have been adopted and the lower group of under 250 smd applies throughout the UK. The change in smd values has meant a general shift of holdings into lower size groups and this movement is particularly marked in Northern Ireland as the following figures show:

| Holdings in Northern Ireland—June 1975 ('000) | |---------------------------------------------| | Based on old smd values | Based on new smd values | | 50-199 smd | 16-0 | 50-249 smd | 20-0 | | 200-599 smd | 12-6 | 250-499 smd | 6-9 | | 600-1,199 smd | 3-4 | 500-999 smd | 2-8 | | 1,200 smd and over | 1-2 | 1,000 smd and over | 0-7 | | Total | 33-6 | Total | 30-4 |

As a result of this change, the figures shown in this table are not comparable with those in previous White Papers.

(e) Figures relate to England and Wales only.

(f) Figures included for Scotland and Northern Ireland relate to the December censuses in 1974 and 1976.

(g) Figures included for Northern Ireland relate to pig holdings which had fattening pigs only.

(h) Figures for Scotland, and figures for Northern Ireland in 1977 only, include small numbers of other table fowls.

### Table 4

Number of persons engaged in agriculture (a)

| At June of each year | Average of 1967-69 | 1973 | 1974 | 1975 | 1976 | 1977 (provisional) | |----------------------|-------------------|------|------|------|------|-------------------| | **Workers** | | | | | | | | **Regular Whole-time:** | | | | | | | | Hired: | | | | | | | | Male | 171 | 164 | 157 | 154 | 148 | | | Female | 16 | 16 | 15 | 13 | 12 | | | Family: | | | | | | | | Male | 45 | 39 | 37 | 35 | 38 | | | Female | 15 | 14 | 13 | 12 | 7 | | | All male | 297 | 216 | 203 | 194 | 189 | 186 | | All female | 29 | 31 | 30 | 28 | 25 | 20 | | Total... | (326) | (247)| (233)| (222)| (213)| (206) | | **Regular Part-time:** | | | | | | | | Hired: | | | | | | | | Male | 25 | 24 | 22 | 21 | 21 | | | Female | 26 | 27 | 26 | 26 | 24 | | | Family: | | | | | | | | Male | 16 | 15 | 15 | 14 | 15 | | | Female | 18 | 17 | 18 | 17 | 8 | | | All male | 37 | 41 | 39 | 36 | 35 | 36 | | All female | 24 | 44 | 44 | 44 | 42 | 42 | | Total... | (62) (c) | (85) (c) | (83) (c) | (80) (c) | (77) (c) | (68) (c) | | **Seasonal or Casual:** | | | | | | | | All male | 34 | 40 | 39 | 41 | 45 | 53 | | All female | 35 | 38 | 36 | 32 | 35 | 41 | | Total... | (69) (d) | (78) (d) | (74) (d) | (73) (d) | (80) (d) | (94) (d) | | **Salaried managers (b):** | | | | | | | | All male | 6 | 7 | 7 | 7 | 8 | | | Total employed | 456 | 416 | 398 | 382 | 377 | 375 | | **Farmers, partners and directors** | | | | | | | | Whole-time | 222 | 214 | 212 | 219 (e) | 212 | | | Part-time | 66 | 66 | 68 | 72 (e) | 73 | | | Total... | (288) | (280) | (280) | (292) | (285) | | | **Total** | 704 | 678 | 662 | 669 | 661 | | | **Wives/Husbands of farmers, partners and directors (engaged in farm work)** | | | | | | 82 |

(a) The figures are based on returns in the agricultural census. They include some estimates for figures not directly obtainable from the Scottish census results and for that reason they differ slightly from some of the published United Kingdom census results. Because of changes in the census categories in England and Wales in 1970 and 1972, numbers returned for earlier years are not available on the same basis as those for the most recent years. Before 1977 the figures do not include the wives/husbands of farmers, partners and directors, even though the wives/husbands themselves may be partners or directors. In 1977 wives/husbands of farmers, partners and directors were returned separately, but only if they were engaged in farm work.

(b) Figures relate to Great Britain only.

(c) Includes seasonal or casual workers in Northern Ireland. See footnote (d).

(d) Before 1975 seasonal or casual workers were not returned as a separate item in Northern Ireland, but were included with part-time workers.

(e) The increase in numbers of farmers, partners and directors in 1976 occurred in England and Wales and is thought to reflect a more complete enumeration in the agricultural census.

(f) The decrease in the number of regular whole-time and part-time female workers in 1977 is thought to be explained by the separate return, for the first time in England and Wales, of farmers' wives, some of whom were probably returned previously as family workers.

### TABLE 5

**Estimated average yields of crops and livestock products**

| Calendar years | Unit | Average of 1967-69 | 1973 | 1974 | 1975 | 1976 | 1977 (forecast) | |----------------|------|-------------------|------|------|------|------|-----------------| | **Crops** | | | | | | | | | Wheat | tonnes/hectare | 3.91 | 4.36 | 4.97 | 4.34 | 3.85 | 4.92 | | Barley | | 3.61 | 3.97 | 4.12 | 3.63 | 3.51 | 4.45 | | Oats | | 3.33 | 3.84 | 3.77 | 3.42 | 3.25 | 4.15 | | Potatoes | | 2.49 | 3.04 | 3.16 | 2.23 | 2.16 | 2.86 | | Sugar (a) | | 5.7 | 6.1 | 3.6 | 3.9 | 4.2 | 5.8 | | Oilsed rape | | | | | | | | | Apples: | | | | | | | | | Dessert (b) | | 9.59 | 12.81| 9.57 | 11.65| 10.90| 7.2 | | Culinary (b) | | 8.57 | 13.62| 11.85| 11.94| 12.09| 11.2 | | Pears (b) | | 8.66 | 8.43 | 10.00| 5.45 | 12.50| 8.2 | | Tomatoes (b) | | 96.6 | 117.8| 123.2| 129.5| 137.3| 133.9| | Cauliflowers (b)| | 18.4 | 20.8 | 20.6 | 18.8 | 16.5 | 20.4 | | Hops | | 1.46 | 1.54 | 1.55 | 1.30 | 1.35 | 1.23 | | **Livestock products** | | | | | | | | | Milk (c) | litres/cow | 3,673| 3,975| 3,925| 4,102| 4,267 (e) | 4,407 | | Eggs (d) | no./bird | 210.5| 228.5| 229.5| 229.0| 238.5 (e) | 240.5 |

(a) Sugar-in-beet per crop hectare. (b) Gross yields from cropped area. (c) Yield per dairy type cow per annum. (d) Eggs per laying bird, including breeding flock. (e) 366 days.

### TABLE 6

**Concentrated feedingstuffs**

| Calendar years | Average of 1967-69 | 1973 | 1974 | 1975 | 1976 | 1977 (forecast) | |----------------|-------------------|------|------|------|------|-----------------| | **Usage of home supplies** | | | | | | | | Coarse grains | 7.4 | 8.1 | 7.1 | 6.8 | 6.6 | 6.6 | | Wheat used for feed | 1.7 | 2.6 | 2.3 | 2.8 | 2.4 | 2.2 | | Other supplies (a) | 3.1 | 3.8 | 3.9 | 3.8 | 4.2 | 4.2 | | **Total home supplies** | 12.2 | 14.5 | 13.2 | 13.4 | 12.9 | 13.0 | | **Usage of imported supplies** | | | | | | | | Coarse grains | 3.1 | 2.2 | 2.7 | 2.4 | 2.9 | 3.1 | | Wheat used for feed | 0.8 | 0.9 | 0.3 | 0.5 | 0.8 | 0.5 | | Protein, molasses and other miscellaneous feeds | 2.2 | 1.9 | 1.6 | 1.9 | 2.1 | 1.9 | | **Total imported supplies** | 6.1 | 5.0 | 4.6 | 4.8 | 5.8 | 5.5 | | **Total usage** | 18.3 | 19.5 | 17.8 | 18.2 | 18.7 | 18.5 | | of which home-grown concentrated feeds retained on farms | 3.8 | 4.9 | 3.8 | 4.2 | 3.6 | 3.9 |

(a) Including home-produced by-products from imported materials. | Calendar years | Cereals supplies | '000 tonnes | |----------------|-----------------|-------------| | | Average of 1967-1969 | 1973 | 1974 | 1975 | 1976 | 1977 (forecast) | | **Wheat (a)** | Production | 3,579 | 5,002 | 6,130 | 4,488 | 4,740 | 5,280 | | | Imports (b) | 738 | 583 | 933 | 1,179 | 1,915 | 2,355 | | | from third countries | 3,602 | 3,220 | 1,940 | 2,455 | 1,894 | 1,505 | | | Exports | 8 | 17 | 9 | 195 | 30 | 75 | | | to the Eight | 7 | 15 | 42 | 57 | 97 | 40 | | | to third countries | 3,579 | 738 | 5,002 | 4,488 | 1,179 | 2,355 | | | Total new supply | 7,904 | 8,773 | 8,952 | 7,870 | 8,422 | 9,025 | | | Production as % of total new supply | 45% | 57% | 68% | 57% | 56% | 59% | | | End December farm stocks | 1,987 | 2,530 | 3,580 | 2,320 | 2,300 | 2,850 | | | Disposals (c) | 5,032 | 5,024 | 4,921 | 5,289 | 5,161 | 5,170 | | | (of which home-produced) | (1,610) | (2,167) | (2,312) | (2,404) | (2,289) | (1,940) | | | (of which home-produced) | 2,469 | 3,629 | 2,576 | 3,392 | 2,855 | 2,840 | | | Total Disposals (d) | 7,944 | 9,083 | 7,902 | 9,130 | 8,442 | 8,475 | | **Barley** | Production | 8,717 | 9,007 | 9,133 | 8,513 | 7,648 | 10,745 | | | Imports | 25 | 160 | 684 | 427 | 301 | 505 | | | from the Eight | 290 | 132 | 128 | 75 | 345 | 380 | | | to third countries | 405 | 247 | 148 | 988 | 161 | 430 | | | Total new supply | 8,519 | 9,030 | 9,781 | 7,947 | 8,096 | 11,200 | | | Production as % of total new supply | 102% | 100% | 93% | 107% | 94% | 96% | | | End December farm stocks | 4,700 | 4,160 | 4,530 | 3,940 | 3,200 | 5,430 | | | Disposals (c) | 6,506 | 7,121 | 6,858 | 6,260 | 6,375 | 6,710 | | | (of which home-produced) | (6,267) | (6,927) | (6,185) | (5,926) | (5,894) | (5,960) | | | (of which home-produced) | 1,391 | 1,861 | 2,008 | 1,750 | 1,915 | 1,725 | | | Total Disposals (d) | 8,412 | 9,510 | 9,411 | 8,537 | 8,836 | 8,970 | | **Oats** | Production | 1,305 | 1,080 | 955 | 795 | 764 | 805 | | | Imports (b) | - | 2 | 8 | 20 | 11 | 3 | | | from the Eight | 18 | 6 | 17 | 9 | 42 | 47 | | | to third countries | 33 | 30 | 11 | 4 | 3 | 5 | | | Total new supply | 1,290 | 1,049 | 967 | 820 | 814 | 850 | | | Production as % of total new supply | 101% | 103% | 99% | 97% | 94% | 95% | | | End December farm stocks | 753 | 600 | 570 | 450 | 420 | 450 | | | Disposals (c) | 998 | 939 | 771 | 725 | 643 | 605 | | | (of which home-produced) | (991) | (934) | (765) | (714) | (621) | (595) | | | (of which home-produced) | 119 | 124 | 150 | 140 | 139 | 155 | | | Total Disposals (d) | 1,233 | 1,149 | 997 | 940 | 844 | 820 | | Calendar years | Cereals supplies | '000 tonnes | |----------------|-----------------|-------------| | | Average of 1967-1969 | 1973 | 1974 | 1975 | 1976 | 1977 (forecast) | | **Mixed Corn (e)** | Production | 161 | 192 | 146 | 118 | 89 | 90 | | **Rye (f)** | Production | 11 | 16 | 15 | 19 | 20 | 41 | | Imports (b) : from the Eight | 12 | 21 | 8 | 18 | 8 | 21 | | : from third countries | 12 | 25 | 9 | 15 | 17 | 3 | | **Total new supply** | 23 | 62 | 32 | 52 | 45 | 65 | | **Production as % of total new supply** | 48% | 26% | 47% | 37% | 44% | 63% | | **Maize** | Production | 6 | 3 | 3 | 2 | 2 | 2 | | Imports (b) : from the Eight | 172 | 290 | 957 | 666 | 527 | 125 | | : from third countries | 3,378 | 3,099 | 2,315 | 2,363 | 3,238 | 3,545 | | Exports : to the Eight | 14 | 14 | 19 | 65 | 44 | 25 | | : to third countries | 14 | 14 | 19 | 65 | 44 | 25 | | **Total new supply** | 3,536 | 3,381 | 3,256 | 2,967 | 3,723 | 3,647 | | **Sorghum** | Imports (b) : from the Eight | 15 | 24 | 65 | 100 | 97 | 35 | | : from third countries | 168 | 48 | 360 | 375 | 220 | 140 | | Exports : to the Eight | 1 | 2 | 27 | 8 | 1 | 1 | | : to third countries | 1 | 2 | 27 | 8 | 1 | 1 | | **Total new supply** | 183 | 71 | 423 | 448 | 309 | 174 | | **Total cereals (a)** | Production | 13,773 | 15,303 | 16,382 | 13,936 | 13,263 | 16,963 | | Imports (b) : from the Eight | 950 | 1,080 | 2,655 | 2,410 | 2,859 | 3,044 | | : from third countries | 7,468 | 6,530 | 4,769 | 5,292 | 5,756 | 5,620 | | Exports : to the Eight | 460 | 309 | 189 | 1,279 | 246 | 536 | | : to third countries | 115 | 46 | 60 | 137 | 134 | 40 | | **Total new supply** | 21,616 | 22,558 | 23,557 | 20,222 | 21,498 | 25,051 | | **Production as % of total new supply** | 64% | 68% | 70% | 69% | 62% | 68% | | **End December farm stocks (g)** | 7,400 | 7,290 | 8,680 | 6,710 | 5,920 | 8,730 | | **Total Disposals (h)** | 21,492 | 23,448 | 22,167 | 22,192 | 22,288 | 22,241 |

(a) Includes flour under the heading of wheat imports and exports. (b) Countries of origin cannot be identified with certainty from the Overseas Trade Statistics but transhipments have, where possible, been allocated to country of origin. (c) 1973, 1974, 1975, 1976 and 1977 exclude 22,000, 49,000, 35,000, 41,000 and 40,000 tonnes respectively, of wheat milled and exported as flour. (d) Total new supply adjusted for changes in December farm stocks. (e) Import/export figures are not separately distinguished in Overseas Trade Statistics. (f) Export figures not separately distinguished in Overseas Trade Statistics before 1970 and not significant thereafter. (g) In respect of wheat, barley and oats. (h) Total new supply adjusted for changes in December farm stocks of wheat, barley and oats. | Calendar years | 1973 | 1974 | 1975 | 1976 | 1977 (forecast) | |----------------|------|------|------|------|-----------------| | Production | 31 | 53 | 67 | 111 | 135 | | Imports: from the Eight | 33 | 34 | 17 | 48 | 110 | | : from third countries | 60 | 33 | 28 | 67 | 90 | | Exports | 1 | 3 | ... | 1 | 1 | | Total new supply | 123 | 117 | 112 | 225 | 334 | | Production as % of total new supply | 25% | 45% | 60% | 49% | 40% |

### Table 9

| Calendar years | Average of 1967-1969 | 1973 | 1974 | 1975 | 1976 | 1977 (forecast) | |----------------|----------------------|------|------|------|------|-----------------| | **Production:** | | | | | | | | early (a) | 543 | 463 | 458 | 350 | 371 | 419 | | maincrop | 6,220 | 6,382| 6,333| 4,201| 4,418| 6,152 | | **Total production** | 6,763 | 6,845| 6,791| 4,551| 4,789| 6,571 | | **Exports:** | | | | | | | | to the Eight | 82 | 21 | 6 | 4 | 3 | 2 | | to third countries | 201 | 146 | 144 | 81 | 97 | | | **Crop available for human consumption** | 4,996 | 5,299| 5,328| 3,659| 3,574| 5,058 | | Potatoes unsold at 31 December | 2,164 | 2,369| 2,332| 1,079| 1,320| 2,154 | | **Total Disposals of home crop for human consumption** | 5,005 | 5,175| 5,365| 4,912| 3,333| 4,224 | | **Supplies from Channel Islands (early)** | 45 | 27 | 23 | 24 | 15 | | | **Imports for human consumption:** | 334 | | | | | | | Raw: (b) | | | | | | | | early: | 4 | 21 | 67 | 12 | 25 | | | from the Eight | 225 | 208 | 167 | 258 | 346 | | | from third countries | 9 | | 134 | 269 | 86 | | | maincrop: | | | | | | | | from the Eight | 145 | 47 | 54 | 54 | 66 | 42 | | from third countries | 70 | 46 | 48 | 398 | 303 | | | Processed: (c) | | | | | | | | from the Eight | 5,493 | 5,566| 5,721| 5,412| 4,450| 5,157 | | from third countries | 4,567 | 4,557| 4,226| 3,032| 3,777| | | **Total new supply for human consumption** | 9,999 | 1,164| 1,186| 1,418| 1,380| | | of which: raw | 91% | 93% | 94% | 91% | 75% | 82% | | processed (c) | 99% | 100% | 100% | 100% | 100% | 100% |

(a) Up to 1968 all early varieties. As from 1969 potatoes lifted before 1 August in any year. (b) Excludes seed potatoes. (c) Raw equivalent.

### Table 10: Sugar Supplies

| Calendar years | Average of 1967-1969 | 1973 | 1974 | 1975 | 1976 | 1977 (forecast) | |----------------|----------------------|------|------|------|------|-----------------| | Production (a) | 882 | 963 | 568 | 641 | 695 | 975 | | Imports (b): | | | | | | | | from the Eight | 51 | 60 | 292 | 513 | 288 | 335 | | from third countries | 1,990 | 1,907| 1,870| 1,712| 1,713| 1,480 | | Exports (b): | | | | | | | | to the Eight | 23 | 6 | 2 | 2 | 16 | 5 | | to third countries | 220 | 343 | 300 | 352 | 246 | 205 | | Total new supply| 2,680 | 2,581| 2,428| 2,512| 2,434| 2,580 | | Production as % of total new supply | 33% | 37% | 23% | 25% | 29% | 38% |

(a) Sugar coming out of the factory in the early part of the new year is regarded as being part of the previous calendar year’s production.

(b) Includes only sugar as such and takes no account of the sugar content of processed products.

### Table 11

**Supplies of certain horticultural crops**

| Calendar years | Average of 1967-1969 | 1973 | 1974 | 1975 | 1976 | 1977 (forecast) | |----------------|----------------------|------|------|------|------|-----------------| | **Apples (excludes cider apples)** | | | | | | | | Cropped area ('000 hectares) | | | | | | | | Dessert | 23-25 | 21-55 | 21-24 | 20-37 | 20-35 | 20-3 | | Culinary | 15-48 | 12-73 | 12-64 | 11-84 | 11-69 | 11-3 | | **('000 tonnes)** | | | | | | | | Output | | | | | | | | Dessert | 212 | 257 | 189 | 224 | 198 | 140 | | Culinary | 126 | 169 | 138 | 122 | 132 | 126 | | Imports: from the Eight | 74 | 164 | 191 | 210 | 257 | 240 | | : from third countries | 187 | 154 | 121 | 120 | 125 | 70 | | Exports: to the Eight | (a) | 12 | 15 | 13 | 14 | 13 | | : to third countries | | | | | | | | Total new supply | 590 | 667 | 673 | 645 | 711 | 581 | | Output as % of total new supply | 57% | 64% | 49% | 54% | 46% | 46% | | End December farm stocks | 78 | 149 | 100 | 118 | 104 | 86 | | **Pears (excludes perry pears)** | | | | | | | | Cropped area ('000 hectares) | 5-83 | 5-22 | 5-21 | 5-20 | 5-10 | 5-2 | | ('000 tonnes) | | | | | | | | Output | 47 | 43 | 46 | 27 | 59 | 41 | | Imports: from the Eight | 28 | 23 | 30 | 36 | 28 | 25 | | : from third countries | 32 | 25 | 18 | 15 | 20 | 17 | | Exports: to the Eight | (a) | 1 | 1 | 1 | 2 | 2 | | : to third countries | | | | | | | | Total new supply | 105 | 89 | 92 | 84 | 94 | 85 | | Output as % of total new supply | 45% | 48% | 50% | 32% | 63% | 48% | | End December farm stocks | 9 | 13 | 14 | 7 | 17 | 12 | | **Cauliflowers** | | | | | | | | Cropped area ('000 hectares) | 17-93 | 16-33 | 15-96 | 15-70 | 14-39 | 14-04 | | ('000 tonnes) | | | | | | | | Output | 312 | 297 | 313 | 255 | 216 | 274 | | Supplies from Channel Islands | 15 | 8 | 15 | 7 | 11 | 5 | | Imports: from the Eight | 32 | 16 | 14 | 25 | 20 | 22 | | : from third countries | | | | | | | | Total new supply | 359 | 321 | 345 | 287 | 251 | 305 | | Output as % of total new supply | 87% | 93% | 91% | 89% | 86% | 90% |

### Supplies of certain horticultural crops

| Calendar years | Average of 1967-1969 | 1973 | 1974 | 1975 | 1976 | 1977 (forecast) | |----------------|----------------------|------|------|------|------|-----------------| | **Tomatoes** | | | | | | | | Cropped area ('000 hectares) | 1.03 | 1.02 | 0.99 | 0.95 | 0.95 | | | ('000 tonnes) | | | | | | | | Output | 98 | 117 | 121 | 122 | 128 | 124 | | Supplies from Channel Islands | 69 | 61 | 58 | 61 | 58 | 55 | | Imports: from the Eight | 53 | 35 | 42 | 46 | 32 | 33 | | : from third countries | 110 | 107 | 113 | 95 | 94 | 95 | | Exports | | 1 | 1 | 1 | 3 | 2 | | Total new supply | 330 | 319 | 333 | 323 | 309 | 305 | | Output as % of total new supply | 30% | 37% | 36% | 38% | 41% | 41% |

(a) Not available—believed insignificant.

### Table 12

**Hops supplies**

| Calendar years | Average of 1967-1969 | 1973 | 1974 | 1975 | 1976 | 1977 (forecast) | |----------------|----------------------|------|------|------|------|-----------------| | Production | 10.6 | 10.4 | 10.2 | 8.3 | 8.0 | 7.3 | | Imports: from the Eight | 0.3 | 0.8 | 0.7 | 0.7 | 1.1 | 1.3 | | from third countries | 0.6 | 0.5 | 0.9 | 0.6 | 0.7 | 0.7 | | Exports: to the Eight | 0.9 | 0.7 | 0.6 | 0.3 | 0.4 | 0.3 | | to third countries | 0.1 | 0.1 | 0.2 | 0.2 | 0.2 | 0.3 | | Total new supply | 10.5 | 10.9 | 11.1 | 9.1 | 9.2 | 8.7 | | Production as % of total new supply | 101% | 95% | 92% | 91% | 87% | 84% |

### Table 13

**Supplies of herbage seeds (a)**

| June/May years | Average of 1966/67-1968/69 | 1973/74 | 1974/75 | 1975/76 | 1976/77 | 1977/78 (forecast) | |----------------|-----------------------------|---------|---------|---------|---------|-------------------| | Area ('000 hectares) (b) | 14.7 | 22.6 | 24.0 | 22.6 | 17.2 | 17.0 | | ('000 tonnes) | Production—all seed | 14.2 | 21.2 | 16.7 | 16.4 | 10.5 | 10.6 | | of which certified seed | (9.5) | (16.1) | (15.2) | (15.5) | (10.5) | (10.6) | | Imports—all seed: | 9.9 | 8.1 | 7.0 | 11.1 | 11.0 | 9.4 | | from the Eight | 8.5 | 10.9 | 7.1 | 5.1 | 2.2 | 2.2 | | from third countries | 1.4 | 1.0 | 0.9 | 2.1 | 0.5 | 0.2 | | Exports—all seed: | 1.0 | 1.1 | 0.7 | 2.1 | 0.5 | 0.2 | | to the Eight | 1.1 | 0.5 | 0.7 | 2.1 | 0.5 | 0.2 | | to third countries | 30.5 | 38.6 | 29.2 | 30.0 | 28.5 | 28.5 | | Total supply | Production as % of total supply | 47% | 55% | 57% | 55% | 37% |

(a) Grass and clover. (b) Certified seed only. | Calendar years | Meat Supplies (a) | '000 tonnes | |----------------|------------------|-------------| | | Average of 1967-1969 | 1973 | 1974 | 1975 | 1976 | 1977 (forecast) | | **Beef and veal** | | | | | | | | Production | 946 | 887 | 1,086 | 1,219 | 1,069 | 1,019 | | Imports (b): | | | | | | | | from the Eight | 116 | 74 | 208 | 208 | 187 | 234 | | from third countries | 197 | 263 | 86 | 39 | 62 | 56 | | Exports (live and meat): | 52 | 96 | 75 | 134 | 112 | 97 | | to the Eight | 2 | 5 | 3 | 3 | 3 | 2 | | to third countries | 2 | 4 | 4 | 5 | 4 | 4 | | Supplies to the Channel Islands | 2 | 4 | 4 | 5 | 4 | 4 | | Total new supply | 1,202 | 1,119 | 1,299 | 1,324 | 1,199 | 1,206 | | Production as % of total new supply | 79% | 79% | 84% | 92% | 89% | 84% | | **Mutton and lamb** | | | | | | | | Production | 244 | 236 | 253 | 264 | 248 | 238 | | Imports: from the Eight (c) | 7 | 2 | 2 | 2 | 1 | 1 | | from third countries | 347 | 264 | 212 | 242 | 225 | 217 | | Exports (live and meat): | 11 | 29 | 26 | 36 | 35 | 41 | | to the Eight | 1 | 1 | 2 | 2 | 3 | 3 | | to third countries | 1 | 1 | 2 | 1 | 2 | 2 | | Supplies to the Channel Islands | 1 | 1 | 2 | 1 | 2 | 2 | | Total new supply | 586 | 472 | 436 | 468 | 434 | 410 | | Production as % of total new supply | 42% | 50% | 58% | 56% | 57% | 58% | | **Pork** | | | | | | | | Production | 587 | 683 | 695 | 572 | 584 | 633 | | Imports: from the Eight (c) | 3 | 14 | 6 | 14 | 12 | 13 | | from third countries | 3 | 6 | 1 | 3 | 1 | 1 | | Exports (live and meat): | 8 | 14 | 24 | 7 | 10 | 14 | | to the Eight | 2 | 2 | 2 | 1 | 3 | 2 | | to third countries | 1 | 1 | 2 | 1 | 2 | 2 | | Supplies to the Channel Islands | 1 | 1 | 2 | 1 | 2 | 2 | | Total new supply | 583 | 689 | 675 | 579 | 583 | 631 | | Production as % of total new supply | 101% | 99% | 103% | 99% | 100% | 100% | | **Bacon and ham** | | | | | | | | Production | 220 | 252 | 243 | 210 | 222 | 221 | | Imports: from the Eight | 335 | 276 | 265 | 252 | 240 | 244 | | from third countries | 70 | 38 | 23 | 21 | 16 | 18 | | Exports | 1 | 1 | 2 | 1 | 2 | 2 | | Supplies to the Channel Islands | 1 | 1 | 2 | 1 | 2 | 2 | | Total new supply | 623 | 564 | 527 | 482 | 475 | 479 | | Production as % of total new supply | 35% | 45% | 46% | 44% | 47% | 46% | | Calendar years | Average of 1967-1969 | 1973 | 1974 | 1975 | 1976 | 1977 (forecast) | |----------------|----------------------|------|------|------|------|-----------------| | **Poultrymeat** | | | | | | | | Production | 509 | 664 | 652 | 628 | 663 | 676 | | Imports: from the Eight | 8 | 7 | 7 | 7 | 5 | 7 | | from third countries | 3 | 3 | 2 | 2 | 1 | 1 | | Exports | 1 | 3 | 2 | 2 | 13 | 36 | | Supplies to the Channel Islands | 1 | 2 | 2 | 2 | 4 | 2 | | Total new supply | 515 | 669 | 654 | 633 | 652 | 646 | | Production as % of total new supply | 99% | 99% | 100% | 99% | 102% | 105% | | **Total meat supplies** | | | | | | | | Production | 2,506 | 2,721| 2,929| 2,893| 2,785| 2,787 | | Imports(b): from the Eight (c) | 469 | 373 | 487 | 483 | 445 | 499 | | from third countries | 617 | 574 | 322 | 306 | 305 | 293 | | Exports (live and meat) | 78 | 149 | 134 | 185 | 179 | 195 | | Supplies to the Channel Islands | 5 | 9 | 12 | 10 | 15 | 12 | | Total new supply | 3,509 | 3,511| 3,591| 3,486| 3,342| 3,376 | | Production as % of total new supply | 71% | 77% | 82% | 83% | 83% | 83% |

(a) Does not include meat offals or trade in preserved or manufactured meat products (e.g. canned meat). (b) Boneless beef and veal have been converted to bone-in weights, in order to bring imports into line with the home production figures. (c) Includes meat from animals imported fat from Irish Republic. | Calendar years | Average of 1967-69 | 1973 | 1974 | 1975 | 1976 (d) | 1977 (forecast) | |----------------|-------------------|------|------|------|----------|----------------| | Sales through milk marketing schemes: | | | | | | | | for liquid consumption | | | | | | | | for manufacture: | | | | | | | | butter | 1,136 | 2,224 | 1,239 | 1,095 | 2,053 | 2,772 | | cheese (a) | 1,253 | 1,819 | 2,181 | 2,361 | 2,040 | 2,150 | | cream | 751 | 958 | 1,006 | 1,003 | 964 | 957 | | condensed milk—full cream (b) | 630 | 603 | 580 | 502 | 524 | 579 | | milk powder—full cream... | 214 | 219 | 260 | 195 | 175 | 175 | | other | 105 | 122 | 132 | 114 | 103 | 107 | | Total for manufacture | 4,089 | 5,945 | 5,399 | 5,270 | 5,858 | 6,739 | | Total sales | 11,606 | 13,468 | 13,098 | 13,133 | 13,618 | 14,221 | | Used on farms (c) | 302 | 231 | 221 | 210 | 201 | 194 | | Output for human consumption... | 11,908 | 13,699 | 13,319 | 13,343 | 13,819 | 14,415 |

(a) Includes farmhouse cheese made under milk marketing schemes. (b) Includes condensed milk used in the production of chocolate crumb. (c) Includes farmhouse manufacture of butter and cream, milk consumed in farm households and sales outside milk marketing schemes. (d) 366 days.

### Table 16

**Milk product supplies**

| Calendar years | Average of 1967-69 | 1973 | 1974 | 1975 | 1976 | 1977 (forecast) | |----------------|-------------------|------|------|------|------|-----------------| | **Butter** | | | | | | | | Opening Stocks | 42 | 69 | 61 | 67 | 83 | 107 | | Production (a) | 50 | 98 | 54 | 48 | 90 | 120 | | Imports (b) from the Eight | 159 | 186 | 326 | 364 | 275 | 215 | | from third countries | 297 | 152 | 120 | 124 | 123 | 120 | | Exports (inc. re-exports): | | | | | | | | to the Eight | ... | 5 | 2 | 1 | 14 | 14 | | to third countries | 3 | 11 | 2 | 2 | 2 | 2 | | Total Supply | 546 | 489 | 558 | 601 | 555 | 545 | | Closing Stocks | 40 | 61 | 67 | 83 | 107 | 139 | | Offtake | 506 | 428 | 491 | 517 | 449 | 406 | | Production as % of offtake | 10% | 23% | 11% | 9% | 20% | 29% | | **Cheese** | | | | | | | | Opening Stocks | 55 | 85 | 74 | 71 | 100 | 100 | | Production (a) | 122 | 182 | 218 | 235 | 204 | 214 | | Imports: from the Eight | 55 | 83 | 101 | 119 | 114 | 100 | | from third countries | 110 | 54 | 21 | 33 | 33 | 15 | | Exports (inc. re-exports): | | | | | | | | to the Eight | 1 | 3 | 3 | 4 | 6 | 6 | | to third countries | 2 | 3 | 9 | 3 | 4 | 5 | | Total Supply | 339 | 398 | 401 | 452 | 441 | 418 | | Closing Stocks | 61 | 74 | 71 | 100 | 100 | 78 | | Offtake | 278 | 324 | 329 | 351 | 341 | 340 | | Production as % of offtake | 44% | 56% | 66% | 67% | 60% | 63% | | **Cream—fresh, frozen and sterilized** | | | | | | | | Opening Stocks | ... | ... | ... | ... | ... | ... | | Production (a) | 67 | 82 | 85 | 84 | 81 | 81 | | Imports: from the Eight | 12 | 11 | 8 | 6 | 5 | 5 | | from third countries | ... | ... | ... | ... | ... | ... | | Exports (inc. re-exports): | | | | | | | | to the Eight | ... | ... | ... | ... | ... | ... | | to third countries | 2 | ... | ... | ... | ... | ... | | Total Supply | 77 | 93 | 93 | 90 | 85 | 85 | | Closing Stocks | ... | ... | ... | ... | ... | ... | | Offtake | 77 | 93 | 93 | 90 | 85 | 85 | | Production as % of offtake | 87% | 88% | 91% | 93% | 95% | 95% | | **Condensed Milk—full cream** | | | | | | | | Opening Stocks (c) | 33 | 30 | 28 | 23 | 21 | 16 | | Production (c) | 245 | 234 | 226 | 195 | 204 | 223 | | Imports: from the Eight | 8 | 11 | 9 | 9 | 9 | 10 | | from third countries | ... | ... | ... | ... | ... | ... | | Exports (d) (inc. re-exports): | | | | | | | | to the Eight | 1 | 1 | ... | 1 | 2 | 2 | | to third countries | 32 | 13 | 16 | 14 | 29 | 24 | | Total Supply | 253 | 262 | 246 | 213 | 203 | 223 | | Closing Stocks (c) | 32 | 28 | 23 | 21 | 16 | 16 | | Offtake | 221 | 234 | 223 | 192 | 187 | 207 | | Production as % of offtake | 111% | 100% | 101% | 102% | 109% | 108% |

### Table 16 (Continued)

#### Milk product supplies

| Calendar years | Average of 1967-69 | 1973 | 1974 | 1975 | 1976 | 1977 (forecast) | |----------------|--------------------|------|------|------|------|-----------------| | **Milk Powder—full cream** | | | | | | | | Opening Stocks | 3 | 4 | 5 | 3 | 2 | 2 | | Production | 27 | 27 | 32 | 24 | 22 | 22 | | Imports: from the Eight | 4 | 13 | 11 | 7 | 4 | 4 | | from third countries | 16 | 2 | | | | | | Exports (inc. re-exports): to the Eight | 1 | 1 | 3 | 3 | 2 | 2 | | to third countries... | 8 | 7 | 8 | 8 | 8 | 9 | | Total Supply | 41 | 39 | 37 | 24 | 17 | 17 | | Closing Stocks | 3 | 5 | 3 | 2 | 2 | 2 | | Offtake | 38 | 35 | 33 | 21 | 15 | 15 | | Production as % of offtake | 71% | 77% | 97% | 114% | 147% | 147% |

#### Skimmed Milk Powder

| Calendar years | Average of 1967-69 | 1973 | 1974 | 1975 | 1976 | 1977 (forecast) | |----------------|--------------------|------|------|------|------|-----------------| | Opening Stocks (e) | 21 | 59 | 60 | 52 | 49 | 26 | | Production | 84 | 158 | 103 | 106 | 173 | 214 | | Imports: from the Eight | 14 | 15 | 10 | 54 | 22 | 20 | | from third countries | 22 | 1 | | | | | | Exports (f) (inc. re-exports): to the Eight | 13 | 92 | 38 | 55 | 102 | 60 | | to third countries... | 10 | 21 | 13 | 5 | 13 | 8 | | Total Supply | 118 | 119 | 123 | 154 | 129 | 192 | | Closing Stocks (e) | 24 | 60 | 52 | 49 | 26 | 86 | | Offtake | 93 | 59 | 71 | 106 | 103 | 106 | | Production as % of offtake | 90% | 268% | 145% | 100% | 168% | 202% |

(a) Includes farmhouse manufacture. (b) Includes butter other than natural (i.e. butter fat and oil, dehydrated butter and ghee). (c) Includes condensed milk used in the production of chocolate crumb. (d) From February 1973 to December 1973 and from January 1975 includes an insignificant amount derived from skimmed milk. (e) Figures for stocks from closing stocks 1973 include Intervention stocks as well as manufacturers' stocks but do not include powder bought by the Irish Republic Intervention agency for storage in the UK. (f) Between February and December 1973 this includes buttermilk and whey powder.

### Table 17

**Egg supplies**

| Calendar years | Average of 1967-1969 | 1973 | 1974 | 1975 | 1976 (a) | 1977 (forecast) | |----------------|----------------------|------|------|------|----------|-----------------| | **Home supplies (b)** | | | | | | | | Packing station throughput: | | | | | | | | sold in shell | 581 | 587 | 605 | 614 | 612 | 597 | | processed | 92 | 42 | 40 | 38 | 36 | 41 | | Other sales (c) | 549 | 536 | 503 | 464 | 501 | 526 | | **Total output for human consumption** | 1,222 | 1,165 | 1,148 | 1,116 | 1,149 | 1,164 | | Imports (d): from the Eight | 12 | 34 | 35 | 38 | 17 | 15 | | from third countries | 38 | 10 | 8 | 2 | 2 | 2 | | Exports (d): to the Eight | 12 | 4 | 9 | 9 | 12 | 14 | | to third countries | 29 | 2 | 1 | 3 | 3 | 4 | | **Total new supply** | 1,231 | 1,203 | 1,181 | 1,144 | 1,153 | 1,163 | | Output as % of total new supply | 99% | 97% | 97% | 98% | 100% | 100% |

(a) 366 days. (b) Hen eggs for human consumption including output from commercially insignificant units. (c) Includes farmhouse consumption and domestic egg production. (d) Includes shell egg equivalent of whole dried, frozen and liquid egg and yolk, but excludes albumen.

### Table 18

**Wool supplies**

| Calendar years | Average of 1967-1969 | 1973 | 1974 | 1975 | 1976 | 1977 (forecast) | |----------------|----------------------|------|------|------|------|-----------------| | **Production: (a)** | | | | | | | | of which clip | 53 | 48 | 50 | 49 | 48 | 47 | | Imports: | (35) | (35) | (35) | (35) | (34) | (33) | | from the Eight | 12 | 16 | 11 | 15 | 19 | 21 | | from third countries | 227 | 135 | 110 | 117 | 143 | 125 | | Exports: | | | | | | | | to the Eight | 14 | 16 | 15 | 19 | 21 | 26 | | to third countries | 12 | 11 | 9 | 10 | 11 | 8 | | **Total new supply** | 266 | 172 | 147 | 152 | 178 | 159 | | Production as % of total new supply | 20 | 28 | 34 | 32 | 27 | 30 |

(a) Figures relate to clip years (June/May) but in practice the bulk of production is within the calendar year.

### Table 19

**Net income, net product and labour productivity**

*All commercially significant holdings*

| Year | FARMING NET INCOME £m at current prices (a) | NET PRODUCT at constant prices (c) | LABOUR PRODUCTIVITY (d) | |------|-------------------------------------------|-----------------------------------|-------------------------| | | including Stock Appreciation | excluding Stock Appreciation (b) | 1975=100 | 1975=100 | | | Actual | 3-year moving average | Actual | | | 1967 | 546 | 509 | 103 | 79 | | 1968 | 504 | 448 | 100 | 79 | | 1969 | 566 | 498 | 102 | 83 | | 1970 | 539 | 473 | 101 | 87 | | 1971 | 686 | 575 | 112 | 99 | | 1972 | 706 | 590 | 111 | 100 | | 1973 | 1,198 | 858 | 113 | 102 | | 1974 | 1,340 | 742 | 114 | 107 | | 1975 | 1,435 | 930 | 100 | 100 | | 1976 | 1,835 | 1,158 | 89 | 91 | | 1977 | 1,796 | 1,348 | 112 | 111 |

Forecasts for 1977 are as at end of October 1977.

(a) Net income is defined as the return to farmers and their wives for their manual and managerial labour and for the use of the occupiers' investment after provision has been made for depreciation. The occupiers' investment includes all tenant-type physical assets in livestock, crops, machinery, etc, but excludes any financial assets and all landlord-type assets such as land and buildings. These figures are not directly comparable with incomes in other sectors of the economy, since farm income also includes elements of wages and changes in stock valuations as well as profits.

(b) This is net income at current prices including the change in the volume of stocks and work-in-progress but excluding stock appreciation (i.e. that part of the change in the value of stocks and work-in-progress attributable to the change in the cost of inputs between the beginning and end of year).

(c) Net product (net output) measures year-to-year changes in the value-added at constant prices by farmers, landowners and farmworkers to all the goods and services purchased from outside the agricultural sector.

(d) Labour productivity is defined here as gross product per person engaged in agriculture. Gross product is gross output less all inputs other than depreciation, labour, net rent and interest. It is measured here at constant prices. In order to be consistent with national economic conventions, gross product as used in the calculation of labour productivity covers agricultural contractors as well as all commercially significant holdings. The total number of persons engaged in agriculture comprises the number of employees, employers and self-employed (excluding farmers' spouses) recorded in the annual June census taken by the Agricultural Departments. Before 1971, however, the trends in numbers of employers and employees were estimated respectively from the Population Censuses and the Department of Employment count of national insurance cards.

### Table 20

**Average earnings and hours of agricultural workers (a)**

| Calendar years | 1973 | 1974 | 1975 | 1976 | 1977 (forecast) | |----------------|------|------|------|------|-----------------| | Earnings £ per week (b) | ... | 27-32 | 34-07 | 42-92 | 50-27 | | Hours per week (c) | ... | 47-2 | 45-9 | 46-0 | 45-5 |

(a) For all hired regular whole-time men.

(b) Earnings include pay for statutory holidays and payments-in-kind which are valued at rates set down by the Agricultural Wages Boards and comprise houses, milk, potatoes, etc (the principal one being houses, most of which were, in England and Wales, valued at 50p before 20 January 1976 and £1-50 thereafter).

(c) All hours worked and statutory holidays. | Calendar years | 1973 | 1974 | 1975 | 1976 | 1977 (forecast) | |----------------|------|------|------|------|-----------------| | **OUTPUT (b) (c)** | | | | | | | Farm crops (d) | | | | | | | Wheat | 227 | 279 | 300 | 334 | 365 | | Barley | 239 | 338 | 330 | 382 | 401 | | Oats | 14 | 17 | 15 | 18 | 20 | | Other cereals | 1 | 1 | 1 | 2 | 2 | | (Total cereals)| (482)| (635)| (646)| (726)| (788) | | Potatoes | 123 | 146 | 317 | 568 | 374 | | Sugar beet | 69 | 59 | 85 | 98 | 143 | | Hops | 9 | 9 | 9 | 11 | 10 | | Other (e) | 29 | 51 | 43 | 36 | 58 | | **1. Total crops** | 712 | 900 | 1,110| 1,469| 1,373 | | **Horticulture** | | | | | | | Vegetables (including mushrooms) | 228 | 286 | 343 | 376 | 455 | | Fruit | 87 | 100 | 91 | 112 | 133 | | Other (f) | 77 | 85 | 93 | 108 | 116 | | **2. Total horticulture** | 392 | 471 | 527 | 596 | 704 | | **Livestock** | | | | | | | Fat cattle and calves | 564 | 617 | 897 | 994 | 1,046 | | Fat sheep and lambs | 156 | 164 | 187 | 240 | 283 | | Fat pigs | 420 | 468 | 493 | 556 | 642 | | Poultry | 210 | 254 | 284 | 344 | 460 | | Other (g) | 18 | 19 | 21 | 24 | 31 | | **3. Total livestock** | 1,366| 1,522| 1,883| 2,158| 2,462 | | **Livestock products** | | | | | | | Milk and milk products | 697 | 837 | 1,065| 1,295| 1,461 | | Eggs | 285 | 306 | 276 | 342 | 393 | | Clip wool | 16 | 17 | 20 | 24 | 31 | | Other (h) | 5 | 6 | 8 | 10 | 10 | | **4. Total livestock products** | 1,003| 1,166| 1,368| 1,670| 1,896 | | **5. Sundry output (i)** | 26 | 31 | 33 | 32 | 38 | | **6. TOTAL OUTPUT (1 + 2 + 3 + 4 + 5)** | 3,500| 4,090| 4,921| 5,925| 6,473 | | **7. Sundry receipts (j)** | 31 | 42 | 46 | 44 | 36 | | **8. Production grants** | 96 | 90 | 152 | 114 | 105 | | **9. TOTAL RECEIPTS (6 + 7 + 8)** | 3,627| 4,222| 5,118| 6,084| 6,613 | | Work-in-Progress Change (k) | +87 | -40 | -60 | -19 | -38 | | Stock Change (l) | -20 | +32 | -143 | -66 | +320 | | **10. Total change due to volume** | +67 | -8 | -203 | -85 | +282 | | **11. GROSS OUTPUT (9 + 10)** | 3,694| 4,214| 4,915| 5,999| 6,896 | | Intermediate output (m) | | | | | | | Feed (n) | 250 | 326 | 299 | 352 | 381 | | Seed | 39 | 48 | 64 | 102 | 107 | | **12. Total intermediate output** | 289 | 375 | 362 | 454 | 488 |

### Table 21 (Continued)

**Output, input and net income (a)**

| Calendar years | 1973 | 1974 | 1975 | 1976 | 1977 (forecast) | |----------------|------|------|------|------|-----------------| | **13. FINAL OUTPUT (11-12)** | 3,405 | 3,839 | 4,553 | 5,545 | 6,408 | | **INPUT** | | | | | | | **Expenditure** | | | | | | | Feedingstuffs | 960 | 1,152 | 1,152 | 1,576 | 1,770 | | Seeds | 79 | 97 | 118 | 181 | 204 | | Livestock (imported and inter-farm expenses) | 94 | 103 | 125 | 108 | 138 | | Fertilisers and lime (o) | 210 | 292 | 320 | 369 | 436 | | Machinery | 233 | 289 | 345 | 402 | 477 | | of which: Repairs | (112) | (129) | (156) | (179) | (209) | | Fuel and oil | (82) | (117) | (131) | (156) | (192) | | Other (including contract services) | (39) | (43) | (58) | (67) | (76) | | Farm maintenance (p) | 132 | 151 | 178 | 211 | 245 | | Miscellaneous expenditure (q) | 223 | 284 | 363 | 423 | 469 | | **14. TOTAL EXPENDITURE (r)** | 1,931 | 2,368 | 2,601 | 3,269 | 3,738 | | **Stocks (s)** | | | | | | | Change due to volume | -8 | -17 | +12 | -30 | +5 | | **16. GROSS INPUT (14+15)** | 1,923 | 2,351 | 2,613 | 3,240 | 3,743 | | **17. NET INPUT (16-12)** | 1,634 | 1,976 | 2,250 | 2,786 | 3,255 | | **18. GROSS PRODUCT (11-16) or (13-17)** | 1,770 | 1,863 | 2,302 | 2,760 | 3,153 | | **Depreciation** | | | | | | | Machinery | 195 | 255 | 342 | 405 | 503 | | Other (p) | 88 | 117 | 152 | 195 | 245 | | **19. Total depreciation** | 282 | 372 | 494 | 600 | 747 | | **20. NET PRODUCT (18-19)** | 1,488 | 1,491 | 1,808 | 2,160 | 2,405 | | Labour | 503 | 608 | 748 | 868 | 935 | | Net rent (t) | 54 | 42 | 33 | 21 | 6 | | Interest (u) | 73 | 99 | 98 | 113 | 116 | | **21. FARMING NET INCOME excluding stock appreciation** | 858 | 742 | 930 | 1,158 | 1,348 | | Stock appreciation (v) | | | | | | | Livestock | +233 | +305 | +289 | +424 | +381 | | Crops and other | +107 | +292 | +216 | +253 | +67 | | **22. Total** | +340 | +597 | +505 | +677 | +447 | | **23. FARMING NET INCOME including stock appreciation (21+22)** | 1,198 | 1,340 | 1,435 | 1,835 | 1,796 |

Estimates for 1977 are as at end of October 1977.

(a) The estimates represent value at current prices for commercially significant holdings which, broadly speaking, are holdings with 26 standard man-days or more.

(b) Because this table relates to output ie sales, rather than total production, the quantities used are not the same as those shown for home production in the supply tables (Tables 6-18). Output is netted of Value Added Tax (VAT) collected on the sale of inedible products, which is repaid to H.M. Customs and Excise. Figures include subsidies.

Excludes deficiency payments on retained cereals and compensation payments on unsold potatoes—see (J).

Deficiency payments on cereal retentions, Potato Marketing Board compensation payments, animal disease compensation, co-operative society dividends and interest and other miscellaneous receipts.

Growing crops and livestock numbers; closing level minus opening level.

Stocks of unsold harvested crops; closing level minus opening level.

Sales included in Output but subsequently repurchased and so reappearing as Input.

Cereals, potatoes, beans, hay and dried grass.

Before subsidy where applicable.

Including landlord-type maintenance work.

Electricity, veterinary expenses, pesticides, rates and miscellaneous costs.

Expenditure is netted or VAT reclaimed in the normal way, but each heading includes VAT paid without recovery by, for example, unregistered producers. The total unrecovered tax is estimated at £10 million for 1975, £12 million for 1976 and for 1977 £13 million.

Feed (purchased) and fertilisers. Opening stock minus closing stock.

Net Rent is the residual after deducting landlords' maintenance and depreciation from Gross Rent. Landlords' maintenance and landlords' depreciation are included in Farm Maintenance and Depreciation and hence the whole of Gross Rent is treated as a cost to the industry. The estimates of Gross Rent are £205.1 million in 1973, £226.6 million in 1974, £263.1 million in 1975, £309.3 million in 1976 and £359.0 million in 1977.

On commercial debt for current farming purposes.

Stock appreciation measures that part of the change in the value of stocks and work-in-progress attributable to the change in the cost of inputs between the beginning and end of year.

### Table 22

| Calendar years | Farm rents (a) | |----------------|----------------| | | Index of gross rents per hectare | | | 1975 = 100 | | 1967 | 54.7 | | 1968 | 59.8 | | 1969 | 63.0 | | 1970 | 67.2 | | 1971 | 70.9 | | 1972 | 74.9 | | 1973 | 79.2 | | 1974 | 86.1 | | 1975 | 100.0 | | 1976 | 119.1 | | 1977 (provisional) | 137.8 |

(a) Gross rents per hectare vary considerably between different regions and sizes and types of farm. Detailed information on farm rents is published in "Farm Rents in England and Wales" and in "Scottish Agricultural Economics". In Northern Ireland almost all land is held by owner-occupiers.

### Table 23

| Calendar years | Gross capital formation (a) £ million | |----------------|-------------------------------------| | | Average of 1967-69 | 1973 | 1974 | 1975 | 1976 | 1977 (provisional) | | Plant, machinery and vehicles | 130 | 231 | 308 | 372 | 500 | 614 | | Buildings and works | 89 | 209 | 251 | 241 | 226 | 258 | | Work-in-progress and stocks (b) | 62 | 415 | 606 | 290 | 622 | 724 | | Total | 281 | 855 | 1,165 | 903 | 1,348 | 1,596 |

(a) Capital formation represents investment by tenants, landlords, and owner-occupiers. Investment in plant and machinery is normally tenant-type. Investment in buildings and works is normally landlord-type. In practice, however, there are many variations in the division between the two responsibilities. The figures in the table represent gross expenditure before crediting any grants which reduce the cost to the owner or occupier. Annual charges in the form of depreciation are made for these items in calculating aggregate farming net income.

(b) See Table 21 (Item plus item 22 minus item 15).

### Table 24

Specimen net incomes for different types of farm (a)

| Type of farm | Average size of farm in sample | Weighted average net income (excluding breeding livestock stock appreciation) per farm (for an identical sample in the two years) | Percentage change % | |--------------|--------------------------------|-----------------------------------------------------------------------------------------------------------------|---------------------| | | Hectares of crops and grass | Standard man-days (smd) | 1975/76 | 1976/77 | | | **England (275–4199 smd) (b)** | | | | | | | Specialist dairy | 50 | 970 | 6,247 | 6,508 | + 4 | | Mainly dairy | 80 | 1,182 | 8,296 | 8,517 | + 3 | | Mainly sheep | 71 | 791 | 4,609 | 5,954 | + 29 | | Cattle and sheep | 83 | 759 | 5,982 | 6,691 | + 12 | | Cereals | 142 | 990 | 9,489 | 12,474 | + 31 | | General cropping | 92 | 1,254 | 16,746 | 17,875 | + 7 | | Mixed | 102 | 1,272 | 13,596 | 12,567 | - 8 | | Pigs and poultry | 47 | 1,200 | 12,788 | 9,625 | - 25 | | **All types (excluding horticulture)** | 79 | 1,033 | 9,183 | 9,584 | + 4 | | **Wales (275–4199 smd) (b)** | | | | | | | Specialist dairy | 37 | 734 | 4,808 | 5,848 | + 22 | | Mainly dairy | 51 | 799 | 6,197 | 6,959 | + 12 | | Mainly sheep | 48 | 720 | 3,033 | 4,675 | + 54 | | Cattle and sheep | 66 | 672 | 4,667 | 6,064 | + 30 | | **All types (c) ...** | 52 | 730 | 4,692 | 6,028 | + 28 | | **England and Wales (275–4199 smd) (b)** | | | | | | | **All types (excluding horticulture)** | 74 | 986 | 8,501 | 9,044 | + 6 | | **Scotland (275 smd and over) (b)** | | | | | | | Dairy | 65-4 | 1,205 | 8,879 | 9,580 | + 8 | | Hill sheep | 41-7 | 871 | 4,525 | 6,493 | + 43 | | Upland rearing | 73-0 | 773 | 5,401 | 6,289 | + 16 | | Rearing with arable | 75-0 | 742 | 7,335 | 8,768 | + 20 | | Arable, rearing and feeding | 94-0 | 810 | 10,721 | 14,314 | + 34 | | Cropping | 118-2 | 1,250 | 23,959 | 24,911 | + 4 | | Rearing with intensive livestock | 68-5 | 1,042 | 10,217 | 7,437 | - 27 | | **All types** | 78-9 | 996 | 10,639 | 11,728 | + 10 | | **Northern Ireland (d) (200 smd and over) (b)** | | | | | | | Dairy | 29-9 | 597 | 5,352 | 6,475 | + 21 | | Dairy with pigs and poultry | 23-2 | 719 | 6,622 | 7,616 | + 15 | | Cattle and sheep | 36-7 | 450 | 4,000 | 5,415 | + 35 | | Mixed | 40-6 | 579 | 8,175 | 10,031 | + 23 | | **All types (e) ...** | 33-5 | 573 | 5,861 | 7,098 | + 21 | Almost all farm businesses in Northern Ireland are based on owner-occupied holdings. As rents cannot be

Table 25

Public expenditure under the common agricultural policy (CAP) and on national grants and subsidies (a)

| April/March (financial) years | £ million | |------------------------------|----------| | | 1973/74 | 1974/75 | 1975/76 | 1976/77 | 1977/78 (forecast) | | I Price guarantees and production grants | | (i) Price guarantees on products supported by the CAP | | Cereals (b) | 8.8 | | | | | | Milk (c) | 103.2 | | | | | | Cattle | | | | | | | Pigs | | | | | | | Eggs | 5.7 | 0.3 | | | | | Total (i) | 117.7 | 0.3 | | | | | (ii) Price guarantees on other products | | Sheep | | | | | | | Wool (b) | (-5.2) | (-4.3) | 2.0 | (-2.4) | (-2.2) | | Potatoes (b) | 1.0 | 1.6 | 0.5 | 0.8 | 5.6 | | Total (ii) | (-4.2) | 5.8 | 10.0 | (-1.4) | 3.8 | | (iii) Production grants and subsidies | | Dairy Herd Conversion Scheme | 2.1 | 10.0 | 11.8 | 4.4 | 5.7 | | Guidance Premiums | | 0.1 | 0.6 | 2.2 | 7.8 | | Milk Non-Marketing Premiums | | | | | | | Fertilisers | 14.6 | 6.1 | | | 12.0 | | Lime | 4.5 | 4.5 | 4.7 | 4.6 | 0.1 | | Calves | 33.9 | 48.9 | 61.6 | 26.1 | 24.0 | | Beef cows | 9.2 | 22.1 | 8.1 | 10.5 | 3.2 | | Pig subsidy | 29.2 | | 6.2 | 10.6 | | | Oil for horticulture | | 5.6 | 0.3 | | | | Total (iii) | 64.3 | 126.5 | 87.1 | 54.0 | 63.4 | | Total I | 177.8 | 132.6 | 97.1 | 52.6 | 67.2 |

### Table 25 (Continued)

Public expenditure under the common agricultural policy (CAP) and on national grants and subsidies (a)

| April/March (financial) years | £ million | |------------------------------|----------| | | 1973/74 | 1974/75 | 1975/76 | 1976/77 (forecast) | | **II Support for capital and other improvements** | | | | | | Farm and Horticulture Development Scheme (d) | — | 0.1 | 0.8 | 3.7 | 15.6 | | Farm Accounts | — | — | — | — | 0.2 | | Farm Structure | 1.3 | 1.4 | 1.5 | 1.4 | 1.3 | | Farm Capital Grant Scheme (d) | 67.4 | 77.4 | 65.9 | 54.6 | 56.1 | | Grants absorbed by Farm Capital Grant Scheme | 6.9 | 3.3 | — | — | — | | Grants for horticultural (national schemes) | 10.1 | 5.8 | 3.4 | 2.6 | 2.8 | | Co-operation grants | 0.9 | 0.9 | 1.1 | 0.8 | 1.0 | | Others (e) | 1.3 | 1.0 | 1.0 | 0.2 | 0.6 | | **Total II** | 87.9 | 89.9 | 73.7 | 63.3 | 77.6 | | **III Support for agriculture in special areas** | | | | | | Hill livestock: compensatory allowances (f)—cattle | — | — | 6.3 | 43.9 | 26.0 | | Hill livestock: compensatory allowances (f)—sheep | — | — | 10.8 | 38.8 | 24.4 | | Hill cattle | 16.9 | 35.4 | 1.2 | — | — | | Hill sheep | 10.4 | 19.8 | 2.9 | 0.2 | — | | Winter keep | 7.0 | 12.3 | 1.2 | — | — | | Additional benefit under FHDS and FCGS | 4.8 | 3.4 | 5.9 | 7.0 | 7.7 | | Others (g) | 1.6 | 1.7 | 1.8 | 1.2 | 0.8 | | **Total III** | 40.7 | 72.6 | 30.1 | 91.1 | 58.9 | | **Total I, II, III** | 306.4 | 295.1 | 200.9 | 207.0 | 203.7 | | against which receipts from FEOGA guidance section | — | — | 4.4 | 11.6 | 20.1 | | guarantee section | — | — | — | — | 7.2 | | **IV Market regulation under the CAP (h)** | | | | | | Cereals | 21.3 | 13.4 | 46.2 | 29.8 | 4.8 | | Beef and Veal | 1.2 | 63.7 | 113.0 | 16.3 | 9.4 | | Pigment | 19.0 | 24.1 | 38.6 | 12.3 | 0.4 | | Sugar | 2.6 | 45.7 | 41.2 | 71.2 | 89.2 | | Processed products | 9.7 | 14.1 | 3.4 | 8.8 | 17.0 | | Milk products | 29.5 | 35.8 | 61.8 | 24.1 | 74.6 | | Others (i) | 2.3 | 2.6 | 6.5 | 8.9 | 8.5 | | **Total IV** | 85.6 | 199.4 | 310.7 | 171.4 | 203.9 | | against which receipts from FEOGA guarantee section | 76.7 | 169.6 | 259.6 | 168.7 | 146.5 |

(a) This table excludes expenditure which may benefit farmers but where the value to them is not shown by the expenditure (eg expenditure on animal disease and pest control or on research, advice and education). It does, however, include some expenditure which benefits consumers and overseas exporting interests rather than producers (see note (h)). The figures for years up to and including 1975/76 represent actual expenditure recorded in the Appropriation Accounts. The figures for 1976/77 are subject to confirmation and those for 1977/78 are the latest estimates of expenditure.

(b) Payments in respect of cereals, wool and potatoes relate partly to the crops or clips of the year indicated and partly to the crops or clips in the preceding year or years. The figures shown in brackets reflect the arrangements with the British Wool Marketing Board, whereby deficiency payments made by the Exchequer are repayable from surpluses (excess of market price over guaranteed price) up to the amount of debt owing by the Board to Ministers. (c) Payments on milk reflect the Government policy of holding down the retail price of milk. For public expenditure purposes, they have been attributed to expenditure under the price guarantees in 1973/74 and shown in the body of the table above, but for subsequent years the expenditure has been attributed to the food subsidies programme.

(d) Farmers in special areas are also eligible for additional assistance under the Farm and Horticulture Development Scheme and the Farm Capital Grant Scheme. The estimated benefit is shown separately in section III of the table.

(e) Includes grants in respect of investment on self-propelled machines (agricultural and horticultural), credit\*, forage groups\*, small horticultural production businesses\*, small farmers, farm business records, water supply\*, agricultural drainage\*, special assistance to livestock producers\* and hops restructuring. (Provision for the schemes marked * was included in the 1977/78 Supply Estimates.)

(f) Some unavoidable delay in payments in 1975/76 resulted in a carryover of £16.4 million into 1976/77.

(g) Includes grants for improvement of hill land and livestock rearing land\*, rural roads\*, producers in the Scottish Islands\*, crofting improvements\*, hill cattle agistment subsidy and hill livestock and young stock scheme\*. (Provision for the schemes marked * was included in the 1977/78 Supply Estimates.)

(h) The figures shown are total expenditure before allowing for receipts from FEOGA which are shown separately at the foot of the table. The figures are made up of several elements and include import refunds (net of export levies) on intra-Community trade, import and export refunds on third country trade, the beef premium scheme, aid for private storage and animal feed, certain production subsidies and the net cost of commodities bought into intervention and subsequently sold. The figures for 1974/75, 1975/76 and 1976/77 include the special import subsidy on sugar. Much of the expenditure benefits consumers and overseas exporting interests rather than producers. The consumer subsidy on butter is not included.

(i) Includes eggs, poultrymeat, fruit and vegetables, oilseeds, hops, heritage seeds, dehydrated fodder and fisheries. Also includes expenditure on products covered by the CAP but not produced to any significant extent in the United Kingdom (rice, wine, flax and hemp).

______________________________________________________________________

**TABLE 25 (Continued)**

| Description | £ million | |-------------|-----------| | Net cost change relating to all products | +322.5 |

______________________________________________________________________

**TABLE 26**

Aggregate cost changes since the 1977 Annual Review (a)

| Description | £ million | |-------------|-----------| | Feedingstuffs | -62.2 | | Seeds | -24.6 | | Imported livestock | +7.6 | | Fertilisers and lime | +48.6 | | Machinery (including depreciation) | +175.5 | | Maintenance (including depreciation on equipment) | +15.4 | | Miscellaneous | +58.1 | | Labour | +111.9 | | Gross rent | +33.9 | | Interest | -58.0 | | Transport and marketing | +16.3 |

(a) These estimates are made on the assumption that any change in the cost of an item of expenditure will continue for a full year and that there will be no change from the current usage of that item. They include the effect of all cost changes known up to 6 December 1977.

### Commodity price trends

This table gives indications of the movement in commodity prices at the first point of sale. The series do not always show total receipts by farmers; for some commodities additional premiums or deficiency payments were made to achieve support price levels.

#### Calendar years

| Commodity | 1973 | 1974 | 1975 | 1976 | 1977 (forecast) | |-----------|-------|-------|-------|-------|-----------------| | Wheat (£ per tonne) | Average ex-farm price (a) | 45.77 | 59.88 | 55.96 | 72.39 | 83.24 | | Barley (£ per tonne) | Average ex-farm price (a) | 41.64 | 56.99 | 57.77 | 73.63 | 77.01 | | Oats (£ per tonne) | Average ex-farm price (a) | 37.34 | 53.97 | 55.08 | 67.74 | 73.49 | | Rye (£ per tonne) | Average ex-farm price (a) | 41.4 | 56.0 | 61.1 | 76.0 | 75.0 | | Hops (£ per tonne) | Average farm-gate price (b) | 828 | 876 | 1,074 | 1,360 | 1,360 | | Potatoes (£ per tonne) | Average farm-gate price (c) | 20.7 | 23.6 | 56.8 | 143.4 | 70.0 | | Sugar beet (£ per tonne) | Producer price (d) | 9.41 | 13.96 | 18.41 | 19.58 | 20.27 | | Apples (£ per tonne) | Average market price (e) | 121 | 150 | 175 | 191 | 345 | | Pears (£ per tonne) | Average market price (e) | 144 | 152 | 185 | 189 | 255 | | Tomatoes (£ per tonne) | Average market price (e) | 212 | 237 | 291 | 346 | 420 | | Cauliflowers (£ per tonne) | Average market price (e) | 73.3 | 91.7 | 121.5 | 119.2 | 137.2 | | Cattle (store) (£ per head) | 1st quality Hereford/Friesian bull calves (f) | 64 | 41 | 40 | 56 | 63 | | | 1st quality yearling steers beef/dairy cross (f) | 123 | 97 | 110 | 157 | 174 | | | clean cattle (g) | 37.35 | 33.12 | 38.51 | 52.43 | 58.09 | | Sheep (store) (£ per head) | 1st quality lambs, hoggets and tegs (f) | 13.6 | 12.0 | 14.0 | 19.0 | 24.0 | | | 70.5 | 64.6 | 75.4 | 103.9 | 125.9 | | | (p per kg estimated dressed carcase weight) | 43.79 | 45.98 | 61.90 | 67.32 | 71.47 | | Pigs (£ per kg deadweight) | Average market price (f) | 43.79 | 45.98 | 61.90 | 67.32 | 71.47 | | Broilers (p per kg) | Average wholesale price | 42.9 | 45.8 | 55.0 | 63.6 | 75.9 | | Milk (p per litre) | Average net return to producers (f) | 5.09 | 6.28 | 7.98 | 9.37 | 10.14 | | Calendar years | 1973 | 1974 | 1975 | 1976 | 1977 (forecast) | |----------------|------|------|------|------|-----------------| | **Eggs** (p per dozen) | Average producer price (k) | 23.7 | 24.6 | 22.8 | 27.8 | 31.3 | | **Wool** (p per kg) | Average producer price for clip (f) | 46.7 | 48.2 | 57.1 | 69.5 | 95.5 |

(a) Weighted average ex-farm prices of UK cereals. (b) Average farm-gate prices paid by Hops Marketing Board to growers in England. Hops are not grown elsewhere in the UK. (c) Weighted average price paid to growers by registered merchants for early and main crop potatoes in the UK. (d) Average price paid to growers in the UK by the British Sugar Corporation for sugar beet with a standard sugar content of 16%. (e) Weighted average wholesale prices for England and Wales. (f) Average prices at representative markets in England and Wales. (g) Based on auction market prices up to April 1973, and thereafter on Meat and Livestock Commission all clean cattle prices. (h) UK weighted average market price for animals certified under the Fatstock Guarantee Scheme. (i) UK average market price for clean pigs. (j) Derived by dividing total value of output (Table 21) by the total quantity of output available for human consumption (Table 15). (k) Average price of all Class A eggs weighted according to quantity in each grade. (l) Average price paid to producers by the British Wool Marketing Board. CABINET

MEMORANDUM FOR LIAISON COMMITTEE ON EXCHANGE CONTROL

Note by the Chancellor of the Exchequer

At a meeting of the Ministerial Committee on Economic Strategy in December I was invited to put to the Cabinet an information paper on exchange control which could be circulated to the Parliamentary Labour Party/Trades Union Congress Liaison Committee. I attach a memorandum for this purpose which is intended to describe briefly why our exchange control regime developed in its present form; to explain the reasons for the limited changes made recently; and to outline the arguments which are being advanced for and against further changes in terms which will not unsettle the markets or pre-empt Cabinet discussion by appearing to imply the direction of future Government policy. I should be glad to know if my colleagues agree that this is a suitable paper for discussion by the Liaison Committee at their meeting on Monday 23 January. I would propose also to circulate as background to the Liaison Committee the Treasury Economic Progress Report of September 1976, containing an article on the economic impact of foreign investment, "International Investment and the Balance of Payments", a copy of which I also attach.

D W H

Treasury Chambers

16 January 1978 UK EXCHANGE CONTROL

General

The broad objective of exchange control is to conserve the UK's holdings of gold and foreign currency, and to assist the balance of payments. Its purpose has been to protect our external position rather than directly to influence the domestic economy.

2. Exchange control was first introduced in 1939 under Defence Finance Regulations. It has remained a feature of the British economic scene ever since, under the 1947 Exchange Control Act, which was amended in minor respects in 1968 and 1977. The Act prohibits a wide range of transactions in gold, foreign currency, and securities, except with Treasury permission, and empowers the Treasury to make orders and give directions.

3. The powers under the Act have been used with varying degrees of severity, reflecting changing economic needs, during the 30 years since 1947. Because they have been extended to the sterling area, and because exchange control has been applied to the use of sterling in third country trade since 1976, the controls as a whole are still more stringent than at any time in the 1960's, even after the changes announced in October and December 1977.

4. The administration of the control has been largely delegated to the Bank of England, to be carried out in accordance with the policy of the Treasury at the time, and the Bank in turn devolve functions to authorised banks, and to authorised depositaries in respect of securities. The aim has to be to enable millions of individual transactions, whether for trade, or investment, or personal affairs, to take place with the minimum of friction. consistent with protecting the balance of payments. The control must rely on the co-operation of those it affects, and must be intelligible and credible, as well as seen to be administered fairly.

What the controls are

05. Current payments - ie for imports of goods and services - are generally unrestricted, as they have to be for the free flow of trade. But they may be monitored to check that they are not being used as channels for unauthorised capital movements. And there are controls which try to secure that money which is due from abroad is made available to the reserves in good time, and that payment for goods and services from abroad consists only of what is due, and is not made too soon.

06. The control therefore applies mainly to capital transactions:

    (a) UK residents cannot use official exchange to add to the global stock of portfolio investment in foreign currency securities;

    (b) direct investment overseas, with some exceptions, is not allowed to be financed with official exchange;

    (c) a variety of personal transactions is controlled largely to prevent their use for capital exports which would otherwise not have been permitted.

07. In addition, the foreign currency required by institutions in the private sector like banks and insurance companies, is supplied only in accordance with rules laid down from time to time.

08. The purpose of the controls on outward direct investment is to ensure that it is financed in a way which minimises or eliminates the initial cost to the reserves. The finance can be found from borrowing in foreign currency or from profits which companies are allowed to retain abroad. Official exchange is provided only under the so-called "super-criterion" scheme, which ensures that an equivalent amount of foreign exchange is remitted back to the UK within a prescribed short period, and that there is a continuing return in foreign currency.

09. UK residents cannot buy foreign securities at the expense of the reserves. Generally speaking they can obtain them only if another UK resident is prepared to dispose of such securities. Since the effect of that is a fixed stock, a buyer must be ready to pay a premium - the investment currency premium - to persuade another resident to make a disposal. Recent changes

10. The improvement in our external accounts in 1977 made it possible to make some changes, particularly in areas of exchange control which were introduced to meet a crisis and brought short term benefit to the reserves at a cost to the economy as a whole; and in some controls on personal transactions which were no longer necessary to protect our reserves and which affected individuals unfairly.

11. For example, on 26th October, 1977, we made a change to encourage foreign investment in Britain. Instead of insisting that such investment should be financed in part by bringing in foreign exchange, we permitted all non-resident controlled manufacturing companies in the UK (instead of only some, e.g. from the EEC) to borrow sterling in the UK for their UK business without restriction as to the amount, or to the region in which they were investing.

12. To help our insurance companies and banks to compete for foreign business on equal terms and thus increase our invisible earnings, we made some relaxation in the rules governing the working balances which insurance companies, banks, and merchants, could hold in foreign currency instead of sterling, in relation to their foreign currency business.

13. In addition, certain limits on personal transactions were raised to make some allowance for inflation and depreciation.

14. Other changes were announced in December to take effect from 1st January 1978 in order to secure the necessary EEC authorisations for continuing the main structure of our exchange controls; they were designed to help our economy by meeting the objectives described in paragraph 10. Besides raising the limits for some personal transfers within the EEC, we decided:

(a) To lengthen from 18 months to 3 years the period during which equivalent foreign exchange must accrue under the "super-criterion" and to increase the limit permitted per project from £250,000 to £500,000. This relaxation should help British firms - particularly smaller ones - to to penetrate EEC markets and thus create more jobs at home;

(b) To end the rule under which 25 per cent of the foreign currency receipts from sales of foreign currency securities must be sold on the financial market. This arrangement was helpful in times when the reserves were under great pressure. But there is no longer any need to enforce a transfer of about £200 million a year from private holdings to the reserves, especially as the rate of return we can earn on the reserves is not as high as we can earn abroad. UK holders are now free to switch from less profitable to more profitable overseas securities without incurring a substantial penalty in doing so. This will add to the total of UK assets abroad and increase our future income from them.

The future

15. Any further changes in exchange control will have to be related not only to the development of the current balance and the reserves but also to the needs of the economy as a whole, as determined in particular by the course of the exchange rate and the level of economic growth at which we aim. It is important that the balance of advantage from any changes should lie with the UK.

16. One issue under current discussion is the effect which the existence of exchange controls may have on the level of the exchange rate. Other countries with strong external positions do not have major controls against outflows. It is argued that these controls by limiting the supply of sterling in relation to the demand for it may produce a higher exchange rate - as indeed is their purpose when sterling is under pressure - and that if sterling rises beyond a certain point it will reduce our competitiveness and increase unemployment. A number of arguments are adduced on the other side - that the impact on the exchange rate is only marginal, that the appreciation of sterling by reducing inflation will improve our economic performance, that we cannot yet be confident that we shall maintain our current account surplus through the eighties, and that because the UK economy and financial system are exceptionally open such controls are more necessary here than in some other countries.

17. Another issue is the effect on outward direct investment on investment and jobs in the UK. It is argued on the one hand that a high proportion of direct investment overseas is likely to have a positive net effect on UK exports, and thus to improve not only the balance of payments but also employment at home. In addition, UK investment overseas will increase the flow of invisible earnings and support our economy in the future. On the other hand it is argued that investment at home must increase jobs more directly and produce a higher social return than investment overseas.

18. This raises the question whether withholding official exchange for outward direct investment does in fact produce higher investment at home. The 1967/8 Reddaway Report came to the conclusion that investment abroad from 1955 to 1964 led to an increase in exports. In conditions of less than full employment this implies some increase in jobs and probably in investment inside the UK. Evidence so far available on the situation today does not throw much light on the extent to which decisions to invest at home or overseas are, in practice, alternatives, or are conflicting or complementary. We hope that the work being done in sector working parties under NEDC as part of the Industrial Strategy will throw some further light on this. International investment and the balance of payments

For many years now there has persisted an undercurrent of public concern about the effect of UK investment overseas on the balance of payments. Despite the exchange controls at present in force, some critics continue to argue that the UK is "exporting capital" on a massive scale, to the detriment of the official reserves, the balance of payments generally or the exchange rate, with the result that the Government is forced to run the economy at a lower pressure of demand, and higher level of unemployment, than would otherwise be necessary. In fact, criticisms on these lines are usually based on misunderstanding.

The net additions to our overseas investments in recent years have been financed in such a way that the reserves have been fully protected, and the net effect on the balance of payments of all the identified items connected with international investment - past and present - has been both favourable and massive, averaging some £2½ billion a year over the last three years. Such an outcome is virtually guaranteed by our exchange control rules.

This article begins by explaining briefly the effects of the present exchange control rules. It then shows how a quick reading of the normal balance of payments accounts can lead to misunderstandings. Finally, it presents the figures in a new way which brings together all the identified items in the balance of payments accounts relating to international investment.

Effect of present exchange controls

The authorities do not restrict overseas investment as such, but they do restrict the ways in which companies can finance it. The main features of the current rules on direct investment are as follows.

i. Companies are allowed to finance only a very small proportion of investment with foreign currency out of the official reserves: the only projects which can be so financed to a limited extent are those which meet the "super-criterion", that is to say projects which directly promote exports of goods and services and will bring benefits to the balance of payments equal to the cost of the original investment within a period of eighteen months, and continuing thereafter.

ii. Other direct investments must be financed in ways which minimise or eliminate the cost to the reserves. In practice, almost all such investment is financed by borrowing foreign currency (either direct from overseas banks or through UK banks) or out of profits retained overseas, and in neither case is there any net outflow across the exchanges.

iii. When companies finance their direct investment by foreign currency borrowing this has to be repaid in due course. To protect the reserves, the regulations require that the amounts repaid out of official exchange do not exceed the inflows of funds resulting from the investment.

iv. The UK controlled subsidiaries and branches overseas are required to remit to the UK a large proportion of their profits. The general rule is that at least two-thirds of net taxed earnings must be remitted, although detailed arrangements vary with the type of company and host country regulations. The statistics in balance of payments publications do not appear to bear this out (eg "unremitted profits" amount to more than one-third of total direct investment earnings). But this is largely because exchange control applies only to companies where voting control lies within the UK, whereas the balance of payments statistics include also figures for earnings of overseas companies where the UK interest is a minority; and because remittances of royalties, management fees and certain other earnings count towards the two-thirds requirement, while stock appreciation is generally disregarded in calculating earnings. In practice, many UK-controlled companies remit much more than two-thirds of their net earnings.

The broad effect of rules (i) - (iii) above is that "new" overseas investment (net) by UK companies cannot cost the reserves a significant amount. Rule (iv), on the other hand, ensures a substantial and continuing inflow of funds to the UK from our existing overseas investments.

As far as portfolio investment overseas is concerned, this too is regulated by exchange control and may be undertaken, with permission, in only two ways - either by foreign currency borrowing as above or through the use of "investment currency". The investment currency market is primarily a mechanism to enable portfolio investments in foreign currency securities to be transferred among UK residents. In addition, the requirement to surrender 25 per cent of the sale proceeds at the official rather than at the investment currency rate ensures a continuing benefit to the balance of payments.

Sources of misunderstanding

Despite the rules just described, the impression remains quite widespread that we are exporting capital on a massive scale for investment overseas. How does the misunderstanding arise?

It seems to arise in part from the item in the capital account of the balance of payments called "private investment overseas", which typically carries every year a very large negative entry, or an "outflow" in balance of payments terms. It is often assumed that these "investments" can be compared with investment in machinery, plant and buildings in the UK and that they are draining away the reserves.

In fact, both assumptions are false. "Overseas investment" includes not only fixed investment of the kind just mentioned but also stockbuilding, stock appreciation and other transactions of a financial nature such as additions to or repayments of working capital, other loans and trade credit and transactions in securities. On the other hand, the figures are expressed net of disinvestment. It is thus quite wrong to compare "investment" figures in the balance of payments accounts with "gross domestic fixed capital formation" figures in the national income accounts, which correspond to one of the popular usages of the term "investment".

The second assumption - that the entries under "private investment overseas" show the effect on the reserves of overseas investment - is likewise mistaken. To assess the overall effect on the balance of payments, it is necessary to take account of a number of entries in the balance of payments accounts, relating to the financing of overseas operations - notably borrowing in foreign currency for use overseas and profits etc retained overseas (or "unremitted" profits). When this has been done, it can be seen that the statistics confirm that the exchange control rules are indeed fulfilling their intended function of protecting the reserves and promoting a substantial annual inflow of income from past investments.

A hypothetical example

A simple example may help to illustrate the interrelationship between the various balance of payments entries just mentioned.

Let us suppose that an overseas subsidiary remits £1,000 of profits to the UK, thus increasing the official reserves by this amount. The figure of £1,000 will not appear as such in the summary balance of payments accounts. Instead, the total profits earned overseas (say £1,500) will be entered as a credit under "interest, profits, dividends etc" in the current account and the unremitted element (£500) will appear as a contra-entry in the capital account under "private investment overseas". There are in fact good reasons for presenting the accounts in this way, which follows accepted international practice.

Matters become more complicated if in addition the UK parent has borrowed (say) £750 of foreign currency from a UK bank to finance its overseas operations. In that event the "outflow" under "private investment overseas" will appear even larger (£500 plus £750 equals £1,250), although there will be an offsetting "inflow" of £750 elsewhere in the capital account under "foreign currency borrowing by UK banks". The only direct effect on the reserves is the £1,000 of remitted profits, but the accounts will show:

| Current account | £ | |-----------------|---| | Private investment overseas | -1,250 | | Foreign currency borrowing by UK banks | +750 | | **TOTAL** | **+1,000** |

If the reader of the accounts is unaware of the related entries under the current account and foreign currency borrowing by UK banks, it is quite understandable that he may interpret the £1,250 under private investment overseas as a "capital outflow" or "export of capital".

The example just described, and the effect on the reserves, can be shown more fully as follows.

| Current account items | £ | |-----------------------|---| | Earnings of interest, profits, dividends etc | 1,500 | | of which: unremitted profits | 500 | | **therefore: effect on reserves** | **1,000** |

| Capital account items | £ | |-----------------------|---| | Private investment overseas (net) | -1,250 | | of which: financed by unremitted profits and trade credit | -500 | | **therefore: other investment to be financed** | **-750** | | Foreign currency borrowing to finance investment | 750 | | **therefore: effect on reserves** | **1,000** | | **Overall effect on the reserves** | **1,000** |

**assumed to be zero in this example**

A now presentation

It might be asked - why not score in the current account only remitted profits, and not total profits? There would then be no need for the negative contra-entry in the capital account, which apparently causes misunderstanding. Such an approach, however, would not be consistent with the form of accounting recommended by the IMF and would be open to serious objections. It would misallocate items between the current and capital accounts and would lead to an understatement of both the invisibles surplus and gross national product.

An alternative way of showing more clearly the effect on the balance of payments of international investment is to leave the main accounts as they are but have an additional table on the lines of that used in connection with the example discussed above - a table which brings together all the identified items in the balance of payments accounts which relate to international investment, and shows the combined effect of these items. Such a table would not, of course, show the total effect of overseas investment on the reserves: for this purpose it would be necessary in addition to estimate the effects of overseas investment on UK trade (a problem tackled in the Reddaway Report), and possibly to allow for effects on the exchange rate. With these qualifications, however, a table which brings together all

- Table 20 of the CSO's UK balance of payments 1963-75 (the "Pink Book") already shows much of this material.

† W. D. Reddaway, Effects of UK direct overseas investment: final report, Cambridge University Press, 1968. EFFECT ON RESERVES OF IDENTIFIED BALANCE OF PAYMENTS ITEMS ASSOCIATED WITH INTERNATIONAL INVESTMENT

(implies a transaction favourable to the reserves)

| UK PRIVATE INVESTMENT OVERSEAS\* | 1973 | 1974 | 1975 (provisional) | |---------------------------------|------|------|-------------------| | Current (invisibles) account items | | | | | 1 Interest, profits and dividends | +2,492 | +2,545 | +2,225 | | 2 of which unremitted profits | +535 | +560 | +1,018 | | 3 therefore effect on reserves | +1,957 | +1,985 | +1,207 | | 4 Net receipts from services and royalties | +106 | +125 | +147 | | 5 Interest payments on foreign currency borrowing for investment overseas | -225 | -275 | -350 | | 6 therefore effect on reserves of 1-5 | +1,436 | +1,548 | +1,094 | | Capital account items | | | | | 7 UK private investment overseas (net) | -1,855 | -1,169 | -1,405 | | 8 of which financed by unremitted profits | -535 | -560 | -1,018 | | 9 therefore | -1,320 | -1,609 | -2,423 | | 10 Other net investment to be financed | -741 | -110 | -142 | | 11 Foreign currency borrowing for investment overseas (net) | -762 | +410 | +450 | | 12 therefore effect on reserves of 7-11 | +11 | +520 | +324 | | 13 Combined effect of current and capital account items (6 plus 12) on reserves | +1,449 | +2,069 | +1,328 |

OVERSEAS INVESTMENT IN UK PRIVATE SECTOR

Current (invisibles) account items | | | | |---------------------------------|------|------|-------------------| | 14 Interest, profits and dividends | -792 | -700 | -711 | | 15 of which unremitted profits | -414 | -378 | -477 | | 16 therefore effect on reserves | -136 | -161 | -151 | | 17 Net payments for services and royalties | -614 | -633 | -625 | | 18 therefore effect on reserves of 14-17 | -602 | -660 | -614 | | Capital account items | | | | | 19 Overseas investment in UK private sector (net) | +1,595 | +2,356 | +1,760 | | 20 of which financed by unremitted profits | +414 | +231 | +277 | | 21 therefore effect on reserves | +280 | +116 | +80 | | 22 Direct borrowing abroad (net) to finance overseas investments | +274 | +220 | +203 | | 23 therefore effect on reserves of 19-22 | +862 | +1,660 | +1,164 | | 24 Combined effect of current and capital account items (18 plus 23) on reserves | +348 | +1,022 | +569 | | 25 TOTAL EFFECT ON RESERVES (13 plus 24) | +1,757 | +3,088 | +1,887 |

FOOTNOTES

01. Net of disinvestment. The figures cover direct, portfolio, oil and miscellaneous investment. Further details of the identified capital transactions associated with UK investment overseas are given in table 20 of "United Kingdom Balance of Payments 1965-75" (the "Pink Book"). UK private investment overseas excludes the transactions of certain public corporations.

02. Comprises private sector credits ("Pink Book" table 12) less interest on unrelated export credit, net Eurocurrency earnings, sterling claims, and discount earnings; plus the earnings of certain public corporations.

03. Comprising unremitted profits of affiliates (net) other than that part of unremitted losses caused by dividends exceeding profits.

04. Excluding those of oil companies. These are included within interest, profits and dividends.

05. Rough estimates.

06. Including funds surrendered to the UK official reserves under the 25 per cent surrender scheme: 1973: £158 million; 1974: £265 million; 1975: £180 million.

07. Gross amounts of trade credit extended to and received from overseas affiliates or parents. Such trade credit extended by oil companies cannot be identified.

08. Excluding the effect of certain unidentified transactions, notably the effect of investment by oil companies in the form of trade credit.

09. Comprises private sector debits ("Pink Book" table 13) less interest on issues abroad and on direct borrowing abroad for use abroad, and interest on sterling liabilities and on import credits.

10. Direct borrowing abroad, net of repayments (including net issues abroad) used for financing UK private investment overseas. This is conventionally included in overseas investment in UK private sector (line 19), as well as in line 11, and has therefore to be deducted.

11. Excluding sterling borrowing from UK banks by overseas companies for investment in the UK, which is generally prohibited by Exchange Control. The amount of this borrowing is thought to be small.

The relevant identified flows in the accounts ought at least to prevent the misunderstandings which result from unfamiliarity with the accounts.

The table above has been constructed on these lines and gives figures for the last three years. The upper part of the table corresponds closely to the second of the tables illustrating the hypothetical example discussed earlier. The first section of the table, headed "Current (invisibles) account items", gives the total earnings on our overseas investments and then shows the amounts remitted to the UK (line 6). The second section, headed "Capital account items", shows the net additions to our investments during the periods in question and the extent to which these additions were financed without call on the official reserves - from earnings retained overseas, trade credit from parent companies, foreign currency borrowings etc. The residual item in line 12 then shows the extent of any cost, or benefit, to the reserves. Because investment is calculated net of disinvestment, the overall effect as shown in this line may actually be favourable. The lower part of the table shows comparable figures for overseas investment in the UK private sector.

As can be seen, the table immediately highlights the fact that if one looks at all the identified balance of payments transactions associated with UK private investment overseas, the net effect on the balance of payments has been both favourable and massive—averaging over £1½ billion a year in the last three years. Moreover, this benefit to the reserves becomes still larger—averaging some £2½ billion a year over the same period—when account is taken of overseas investment in the UK private sector. The table also brings out clearly how unremitted profits, or profits retained overseas, contribute to the financing of overseas investment, and in particular how in the last three years the net additions to our overseas investments have been financed in such a way that the overall effect on the reserves has actually been favourable. CABINET

THE GREEN POUND

Memorandum by the Minister of Agriculture, Fisheries and Food

1. We need to consider whether to make an immediate green pound devaluation in the light of parliamentary pressures and the negotiating position on Common Agricultural Policy (CAP) prices in Brussels.

2. There is now a strong case for action to improve the United Kingdom farm support price levels and to ease the problems which excessive MCA (monetary compensatory amount) export subsidies on supplies from other European Economic Community (EEC) countries are causing for the meat processing industry and which could lead to more than three thousand further redundancies. The Annex summarises the key facts including the effects on food prices. Although agriculture has had a much better year in 1977 the underlying trends are unsatisfactory with the beef and pig breeding herds in particular showing sharp declines. The difficulties of these two sectors are due in large measure to their having to compete in the United Kingdom market with highly subsidised imports of Danish bacon and Irish beef. The dairy herd is now also starting to fall and investment in agricultural buildings and works is continuing to fall.

CAP PRICE NEGOTIATIONS

3. In accordance with our strategy towards the CAP our main objective in the price negotiations will be to hold down increases in common prices as close as possible to the average of 2 per cent proposed by the Commission. An increase of this order will not be sufficient to maintain the productive base of our own agriculture and we will need to add to it by devaluing the green pound by 5 per cent or more leaving us with an MCA gap of about 23 per cent. The improvement in the competitiveness of our meat industry afforded by a reduction in the MCAs which would result from an immediate 5 per cent devaluation is, in my view, the minimum that is needed if we are to have a real prospect of arresting the continuing decline in our pig and beef breeding herds. This devaluation would reduce the MCA subsidy on Danish bacon imports by £43 per tonne (a cut of about 18 per cent) and the net MCA subsidy on Irish beef imports by £60 per tonne (a cut of about 20 per cent). There are, moreover, great negotiating advantages in making this devaluation before the Council starts its discussions on CAP prices. This year, with no further transitional steps to increase our support prices and with well known problems in certain sectors the other member states will know that we require more than the 2 per cent common price increase. We need therefore to try to get the green pound issue taken out of the price-fixing to avoid it becoming a lever which other member states can use to achieve their objective of higher common prices. The French and the Italians, to strengthen their own tactical positions, are making green currency devaluations before the negotiations and if we do the same it will strengthen the general case against increased common prices.

THE PARLIAMENTARY SITUATION

4. We have to decide how to deal with the Opposition motion to be debated on 23 January calling for an immediate devaluation of 7½ per cent. The minor parties seem certain to support this and we run a very real risk of defeat if we cannot announce some change in the green pound. We could, of course, make no immediate change and continue to argue that it is for the Government to judge when and by how much to make a devaluation; if we were defeated we could blame the other parties for the food price increases which would follow. But I would strongly oppose our surrendering the initiative in this way. The credibility of our line on the green pound depends on our being prepared to make some move when circumstances justify it. If we could announce a 5 per cent change it would be very difficult for the Opposition to argue that it should have been greater and we would have effectively defused an issue which will otherwise cause us continuing criticism and embarrassment over the coming months.

TIMING

5. We will need to move quickly to persuade the Commission to table a proposal in time for the Council meeting on 23-24 January.

CONCLUSION

6. I invite the Cabinet to agree that I should immediately ask Commissioner Gundelach to table a proposal at the Council on 23-24 January for a 5 per cent green pound devaluation to be effective on 1 February.

JS

Ministry of Agriculture, Fisheries and Food

16 January 1978 ECONOMIC DATA

Agriculture - general position

Agricultural production has increased by about 25% in 1977 as a result of better weather. The index of net product (1975 = 100) is as follows:

| Year | 1973 | 1974 | 1975 | 1976 | 1977 | |------|------|------|------|------|------| | | 113 | 114 | 100 | 89 | 112 |

Farm incomes (excluding stock appreciation) are expected to increase by 16% in money terms in 1978 from £1158 million to £1348 million. In real terms they will have remained about the same.

Cost increases in 1977 were much less than in the previous year. The estimated figure is £322.5 million compared with total inputs of £5,500 million.

The volume of new investment in agriculture is as follows:

| Year | 1973 | 1974 | 1975 | 1976 | 1977 | |------|------|------|------|------|------| | Buildings & Work | 104 | 100 | 79 | 64 | 61 | | Plant & Machinery | 91 | 100 | 93 | 101 | 100 | | Total | 97 | 100 | 87 | 85 | 83 |

Main commodity production trends

Milk production in 1977 was some 42% higher than in 1976 with the increase coming largely from much better yields. The dairy herd expanded by 1% between June 1976 and June 1977 but is now contracting again. Beef production in 1977 is forecast to be about 5% less than in 1976. The specialist beef breeding herd fell by 4% between June 1976 and June 1977 and is still declining.

Pig production is still falling. The breeding herd fell by 7% between June 1976 and June 1977.

Cereals production reached a record level at nearly 17 million tonnes. The acreage was higher than in 1976 but below earlier levels. There was no improvement in sugar beet acreage but production is expected to have increased by over 30% as a result of much better weather.

Net margins in agriculture

Officials have made a preliminary examination of the possible level of returns to agriculture in 1978 and it is considered that for net margins to be maintained at recent levels the following ranges of percentage increases in support prices are indicated for the main commodities:

| Commodity | Range | |-------------|-------| | Wheat | 7-9 | | Barley | 5-8 | | Sugar Beet | 6-7 | | Beef | 7-10 | | Milk | 4-5 |

on total returns which can be achieved either by 10% increase on manufacturing prices (which are affected by the green pound) or by a combination of a smaller manufacturing price increase and some later change in the liquid price. Employment

Total employment in the meat processing industry is estimated at 45,000 of whom about 22,000 are in the pigmeat sector. There have already been 3,000 redundancies in this sector since mid-1976 and there are at present applications for Temporary Employment Subsidy covering a further 3,300 jobs.

Estimated effects of 5% devaluation on retail prices of main foodstuffs

A 5% devaluation would increase the cost of food to the consumer by about 1% after all the effects had worked through. The effect on the all items Retail Price Index would be an increase of about 1%.

Retail price change for the main commodities

| Commodity | Change | Effect | |-------------|--------|---------------------------------------------| | Butter | + 3p lb| Effect not likely to be seen until autumn owing to existence of large stocks of butter and cheese | | Cheese | + 3p lb| | | Beef | + 2p lb| | | Bacon & ham | + 1p lb| | | Bread | + 1p standard loaf | | | Sugar | + 1p kg| |

Public Expenditure

MAFF forecast on a full year basis small savings in public expenditure, taking account of our net contributions to the EEC and expenditure programmes in the UK, although the outcome depends on increased intervention. (Receipts on agricultural levies, accruing to the Exchequer, would also increase). APPROXIMATE INCREASES ARISING FROM A DEVALUATION EARLY IN 1978 OF THE GREEN POUND (£ million) EFFECTS IN A FULL YEAR

| | UK producer's returns | UK consumers' expenditure | UK exchequer receipts | UK foreign exchange costs | FEOGA expenditure | |----------------------|------------------------|---------------------------|-----------------------|--------------------------|-------------------| | | Before feed | After feed | | | | | 5% devaluation | 152 | 115 | 185 | 22 | 32 | -62 |

Notes

1. The estimates are based on quantities of production, trade and consumption forecast for the marketing years of 1978/79.

2. Increases in institutional prices are assumed to be fully reflected in market prices, except for beef, where only a minor part of the increase is likely to be reflected because of an expected hardening of the market during 1978, and for sugar, where the BSC has already set a price for 1978 contracts. Increased returns to beef producers are net after higher costs of imported Irish stores.

3. The devaluation is assumed to affect directly only the price of milk for manufacture, accounting for about half of milk delivered from farms.

4. On these bases a 5% devaluation might ultimately add about 1% to the average retail price of food. The effects on the average retail price of all items would be about one-quarter of 1%. The full effects on food prices from a devaluation on 1 January would only appear in the course of 1978, as distributors worked off stocks, and as prices of intensive livestock products adjusted to higher feed costs.

5. Although the immediate effect on foreign exchange expenditure of the UK would be adverse, there would ultimately be some saving in foreign exchange expenditure, as higher prices here stimulated production, reduced consumption, and so led to a fall in quantities of imported food.

6. Following the decision, in July 1974, to abandon the Maplin airport project, we initiated a wide-ranging review of airports policy. The aim was to devise a policy for Great Britain as a whole rather than to rely on piecemeal solutions and also to ensure that all those affected by airport developments should be involved in the formulation of policy. A consultation document, in two parts, was produced to assist this process. Part 1, published in November 1975, dealt with airports in the London area and Part 2, published in June 1976, considered airports in the rest of Great Britain. Over 600 organisations and many individuals made representations on these documents and Ministers held meetings with the more important organisations.

7. A White Paper setting out the Government's future airports policy is attached. A draft of the White Paper was considered by the Ministerial Committee on Economic and Industrial Policy on 14 December 1977. Following clearance by Cabinet, the Committee agreed that the White Paper should be published subject to amendment of the reference to the significance of airports strategy for regional development; to the inclusion of a more forthright statement about the abandonment of Maplin; and to further consultation between the Secretary of State for Scotland and me about the Highlands and Islands aerodromes. The draft has been amended to take account of the first two points. With regard to the Highlands and Islands aerodromes, subject to one exception, I agree with the Secretary of State for Scotland that the future arrangements for these aerodromes should be left for the Scottish Assembly to consider. Sumburgh, in the Shetland Islands, is vital to the oil industry and the exceptional growth of traffic there presents management problems beyond the experience and abilities of the Civil Aviation Authority (CAA) which now operates the aerodrome. These problems are likely to become more acute and to require aerodrome management skills which can only be provided by the British Airports Authority. In my view, responsibility for Sumburgh should be transferred as quickly as possible to the British Airports Authority. I invite colleagues to consider this issue. If the conclusion is that Sumburgh should be transferred to the British Airports Authority the square brackets in paragraphs 142, 143 and 163 would be deleted. On the other hand if it is decided to leave the aerodrome with the CAA the sections in square brackets would be deleted.

8. The White Paper is long, though no more so than previous White Papers dealing with airports. In the light of the extensive consultations, I believe it is important that the Government's statement should recognise the main arguments that have been deployed and within that context explain the content of the proposed strategy. Sections 1-3 provide a basic framework against which decisions relating to particular airport developments should be considered. I hope that this will provide a guide to policy for many years to come. Section 4 contains decisions which are necessary now on particular developments. Section 5 is a summary of the principal issues and conclusions.

9. Colleagues may wish to take particular note of the following points:

i. The developments proposed for the London area provide capacity for about 72 million passengers by 1990 compared with the forecast range of 66-90 million passengers. There is, therefore, a risk that demand will exceed planned capacity at the end of the 1980s if traffic grows at the highest forecast rate. However, given the considerable uncertainties, set out in the White Paper, surrounding the high forecast; the importance attached to flexibility in airports policy; the need to avoid possibly premature expenditure on further airport capacity; and the probability that the developments proposed could almost certainly cater for a greater number of passengers if the need arose, I think this is a risk which we should accept.

ii. Outside the London area the policy is one of rationalisation. The White Paper states clearly that, with the exception of the Highlands and Islands, further subsidies for airports will not be provided and that wasteful competition will not be encouraged. Certain airports are identified as centres for growth.

iii. The White Paper makes it clear that the Government will seek to encourage the more rapid development of air services in the regions by their concentration at selected airports, but because the overwhelming proportion of passengers live in the South East the White Paper rejects suggestions that measures should be introduced to force these passengers to use airports in the regions.

iv. Although there could be advantages in encouraging the takeover by the British Airports Authority of the strategic regional airports identified in the White Paper, I believe that in the interest of preserving local and regional autonomy, any transfer of airports should be based on agreement between the British Airports Authority and the local authorities concerned rather than on the direction of central Government. v. Further decisions on airport development are likely to be necessary, especially in the South East, where additional airport capacity will be needed for the 1990s if air traffic continues to grow. The White Paper indicates that the Government intends to continue to consult widely on these issues and, in particular, to involve the local planning authorities more closely in the preparation of policy.

5. The proposals in the White Paper minimise expenditure as far as practical and for the current Public Expenditure Survey period are expected to be contained within existing provision.

6. Publication of the White Paper has been widely anticipated for some time and before the Recess the House was informed that publication was expected early in 1978. A clear statement of policy is needed to remove present uncertainties affecting many organisations and people, but more importantly to provide the necessary impetus to the transfer of traffic from Heathrow to Gatwick and to the Public Inquiry on the proposed fourth terminal at Heathrow, both of which are essential to the handling of London area air traffic in the shorter term. Cabinet is invited to approve the White Paper for publication.

ED

Department of Trade

17 January 1978 INTRODUCTION

1 Background 2 Consultations on airports policy 3 Basic assumptions of airports policy

SECTION 1: THE FRAMEWORK FOR AN AIRPORT STRATEGY

1 Introduction 2 Types of airport Gateway international airports Regional airports Local airports General aviation aerodromes 3 The implementation of an airports policy 4 The role of regional diversion 5 Airport capacity limitations 6 Finance and ownership 7 Airport charges 8 Future development of policy 9 The framework

SECTION 2: AIR TRAFFIC FORECASTS

1 Introduction 2 A review of the forecasts 3 Realism of forecasts 4 Cargo forecasts SECTION 3: THE AIRPORT ENVIRONMENT

1 Introduction 2 Aircraft noise 3 Access 4 Planning

SECTION 4: A NATIONAL AIRPORTS SYSTEM

1 Introduction 2 The London area airports Heathrow Gatwick Stansted Luton Adequacy of proposed developments The longer term Costs 3 Airports outside the South East Central England Northern England South Wales and South West England Scotland Central Scotland Northern Scotland 4 General aviation

SUMMARY AND CONCLUSIONS

1 Development of a national airports system 2 The demand for air transport 3 The London area 4 The rest of Great Britain 5 Scotland 6 General aviation 7 Implementation of the strategy 8 Access 9 Aircraft noise 10 Planning 11 Consultation The need to meet the demand for air travel in the London area by building a large new airport on the Maplin sands, in the Thames estuary, 50 miles from London was called into question by four developments in the early 1970s. First, the rapid introduction of large aircraft meant that the major constraints at airports in the London area had become the capacity of passenger terminals rather than runways. Secondly, the new larger aircraft were markedly less noisy than their predecessors, and international agreement on the permitted noise levels of all new jet aircraft suggested that disturbance from aircraft noise would be reduced over the coming years. Thirdly, the exceptional rise in the cost of fuel, involving for the airlines a 250 per cent increase between 1972 and 1974, resulted in traffic forecasts significantly below those experienced in the past or considered to be reasonable by the Roskill Commission. Finally, the economic recession of 1974 necessitated a drastic pruning of public expenditure.

Against this background, the Government re-assessed the Maplin airport project, which was abandoned. It also decided to undertake a comprehensive review of airports policy in Great Britain in consultation with all those concerned. This review was not concerned with Northern Ireland since the development of Belfast Airport does not impinge upon the provision of airport capacity in Great Britain. Neither was it concerned with the Channel Islands or the Isle of Man.

CONSULTATIONS ON AIRPORTS POLICY

3 The Roskill Commission produced one of the most thorough examinations ever undertaken of the options for a major project of public investment. Yet the conclusions of the Commission, in a changing economic climate, were shown within a few years to be based on assumptions of rates of growth of air traffic which were unlikely to be achieved, while the pace of technological development and its effects had been more rapid than expected. Moreover, the recommendation of the Commission, for a new airport on an inland site at Cublington, was itself rejected by the Government. This experience suggested a certain caution, and the need to recognise the wider implications, in the case of projects involving the commitment of vast public resources and affecting many millions of people.

4 The Government decided that, for the future, it was essential to ensure that decisions concerning the development of particular airports were reached after taking full account of the views of all those who use, work at, or are affected by, them. To facilitate this process, and to ensure a wider understanding of the issues the Government produced a two part consultation document "Airport Strategy for Great Britain". Part 1, published in November 1975, covered the London area airports and Part 2 published in June 1976 dealt with the regional Nearly 1000 organisations throughout Great Britain were invited to comment on these documents, including all the local authorities concerned, Regional Economic Planning Councils, amenity groups, airlines, airport authorities and employees and other organisations with an interest in airport developments. In addition, a considerable number of other organisations and individuals submitted comments and advice. The Government believes that this approach to the development of airports policy has been both necessary and useful. The advice which has been received has been virtually unanimous in welcoming the consultation process and endorsing the need to consider airports policy in a national context.

Understandably, a great deal of the advice submitted represented the views of special interests such as the users of an airport or those adversely affected by its operations. The Government's conclusions will not therefore receive universal acceptance. Nevertheless, it is hoped that as a result of the consultations there will be at least a better understanding of the decisions which the Government believes to be necessary. Certainly within Government there is a clearer and deeper understanding of the position of all those with an interest in airport developments.

In developing its policy the Government has been influenced by six main considerations: confirmation of the abandonment of the Maplin airport project; the role of the air transport industry in the national economy; the environmental and land use implications of airport developments; consumer demand; the more effective use of existing airport, road and other infrastructure resources; and flexibility in planning and development which can be related more closely to the growth in demand. The Government has also considered the employment and the industrial development promoted by airports.

8 Until the 1960s, the rapid growth of the air transport industry throughout the world had been little constrained by environmental considerations. Many airports had been built and developed on sites which, had the post war development of civil aviation been foreseen, would not have been acceptable. While the massive investment which has been undertaken cannot be ignored, an increasingly important element of any airports policy must be a recognition of the need to take account of the planning and environmental effects of airport development and specifically the need to limit as far as possible the impact of aircraft noise on areas surrounding airports.

9 However, there needs also to be a proper recognition of the contribution which the air transport industry makes to the United Kingdom economy. Civil aviation is the dominant form of international passenger transport and plays a role both in domestic transport and in international trade. During the period which has seen the decline of traditional industries, air transport has been a high growth industry, and is an area in which the United Kingdom has retained a strong position in the international market. Air transport not only provides a substantial benefit to the economy, but is an essential part of the industrial structure of a country that needs to live by its trade with the outside world. It is also offering increasingly wide opportunities for all sections of the community both to enjoy holidays abroad and to visit friends and relatives living outside the United Kingdom. A small number of those consulted expressed the view that the dis-benefits of aviation, in particular aircraft noise and associated congestion on the ground, were too high a price to pay. However, the majority accepted that, while there must be a proper consideration of the effects of airports on the surrounding areas, ways should be sought for meeting efficiently the growing consumer demand for air transport.

Finally, in the present economic climate an important priority of any policy should be to establish the most effective use of existing airports infrastructure and related investment. Furthermore, under conditions of uncertainty, rigid plans would be inappropriate and there is a need therefore for a strategy which will seek to balance conflicting interests, and at the same time allow for change and adaptation as circumstances unfold. SECTION 1: THE FRAMEWORK FOR AN AIRPORT STRATEGY

INTRODUCTION

11 Air traffic demand has remained overwhelmingly concentrated at the four London area airports of Heathrow, Gatwick, Luton and Stansted which account for about two thirds of all terminal passengers(1) using airports in Great Britain. Heathrow alone handles about half the total terminal passengers and over 60 per cent of the international passengers at airports in Great Britain. While paragraph 46 suggests that there might be grounds for expecting a growth in demand for air travel in areas outside the South East in the period up to 1990 and beyond, a significant increase in capacity will be required at the London area airports.

12 Outside the South East, the problem has been an over provision of airport capacity and an inability to generate traffic. If there is to be an efficient use of the country's resources and encouragement given to the development of viable air services in the regions, a reassessment and rationalisation of the future roles of the regional airports is required. These general requirements of the London and regional airports have been widely recognised by those consulted.

TYPES OF AIRPORT

13 In establishing a framework for an airport strategy the first step is to determine the types of airport required in the various parts of the country in relation to the expected demands.

______________________________________________________________________

(1) Terminal passengers are those passengers who join or leave a flight at an airport; they include all passengers except transit passengers. The 1961 White Paper: Civil Aerodromes and Air Navigational Services (Cmnd 1457) suggested that the principal "gateway" airports should be regarded as part of a national airport system. Part 2 of the consultation document "Airport Strategy for Great Britain" proposed that this concept might merit further development and considered the grouping of airports within a number of categories. Comments received during the consultations indicated some disagreement about the role of particular airports, but there was considerable support for a grouping of airports by category as the basis for a national airports strategy, embracing both the London area and the regions.

14 The grouping of airports will not of itself provide the rationalisation of airport facilities which the Government believes to be necessary, particularly outside the South East of England. This will require the implementation of policies on a range of air transport and related matters and on the decisions and involvement of local authorities, local communities and other organisations. However, with a clear lead from the Government on the role of particular airports, the organisations concerned should be able to relate their individual decisions to an overall strategy.

15 It is not the Government's intention to establish a rigid plan for airport development, since this would fail to recognise the reality of a changing situation. Furthermore, the definitions of the various categories will need to be interpreted flexibly since they will not necessarily be precisely relevant to all airports over a period during which the role of individual airports might change. It is essential therefore that the basic framework should be capable of adaptation to meet changing circumstances and that any modification should be the subject of consideration with those concerned.

16 In the light of comments received during the consultations the Government has adopted the following categories of airport as part of the framework for airports policy.

A Gateway International Airports These airports would provide or be expected to support over time, a wide range and frequency of international services, including inter-Continental services and a full range of domestic services.

B Regional Airports These airports would cater for the principal air traffic demands of individual regions, parts of regions or groups of regions outside the South East. They would be concerned essentially with the provision of a network of shorthaul scheduled international services; a significant range of charter services; and domestic services including links with gateway airports. The scheduled international services would be primarily on the more popular routes to Europe or related to the special associations which exist between some countries and parts of Great Britain, for example, between Scandinavia and North East England and Scotland.

C Local Airports These airports would provide third level services(^{(1)}) catering primarily for local needs, concentrating on general aviation(^{(2)}) with some domestic feeder services and some charter flights.

D General Aviation Aerodromes These would be concerned primarily with the provision of general aviation facilities.

THE IMPLEMENTATION OF AN AIRPORTS POLICY

17 It is not the Government's intention to dictate to airlines and airport authorities the precise conditions under which they should operate, but to give the maximum scope for commercial decision. However, it is its objective to ensure, as far as possible, that the decisions and policies of the aviation authorities and local authorities are consistent with the national airports strategy. The framework in this White Paper and the developments envisaged over the period to 1990, should provide a guide to those policies and decisions.

18 The implementation of airports policy will require the co-operation of many authorities and a positive role for the Government. First, the Government will take account of airports

______________________________________________________________________

(1) Third level services are usually defined as those scheduled passenger services operated by aircraft with fewer than 25 seats.

(2) General aviation encompasses all forms of civil aviation other than the operations of major airlines and includes business and recreational flying and flying training. policy in issuing permits for scheduled and charter services by overseas operators. Secondly, the Civil Aviation Authority (CAA) in considering applications by British operators for new air services and for renewals of existing licences will be expected to take account of airports policy in accordance with paragraph 14 of the guidance contained in the White Paper: Future Civil Aviation Policy of February 1976 (Cmnd 6400).

Thirdly, the Government's policy of encouraging the growth of air services at regional airports outlined in paragraph 22, will be related to the overall objectives of airports policy.

Fourthly, at publicly owned airports the authorities concerned will be expected to relate the development of their airports to the Government's airports policy as well as to the criteria which may from time to time apply to public sector projects. Fifthly, in so far as planning procedures may be relevant, the local authorities concerned will be expected to have regard to airports policy in their consideration of proposals for development at and around airports. Finally, the Government's policies relating to employment and to the provision of roads, housing and other forms of infrastructure will have regard to airports policy.

THE ROLE OF REGIONAL DIVERSION

19 The transfer of some part of the growth in air traffic, which might otherwise take place in the South East, to other regions would have two main benefits. First, it would help to relieve pressure on resources in the South East and secondly, it would contribute to the Government's regional development policies.

20 Comments during the consultations on the diversion of traffic to regional airports indicated a widespread, but not universal, rejection of any policy to require passengers with origins and destinations in the South East to use airports outside the region. Many of the amenity groups and local authorities in the South East felt that the same consideration should be given to the environmental costs as to the costs to the air transport industry and to passengers of diverting traffic to regional airports. In addition, many provincial organisations, while accepting that a large scale diversion of London area passengers was unrealistic, considered that greater attention should be given to attracting back to regional airports passengers currently using London's airports because of the lack of suitable services from regional airports. It was also suggested that the propensity to fly(^{(1)}) in the regions other than the South East, which is about two-fifths of that in the South East, would increase relatively in the future; that there was scope for attracting increasing numbers of foreign tourists direct to these regions; and that provided the airlines were given sufficient encouragement, these additional demands could lead to a greater contribution from the regional airports to the handling of total air traffic demand in Great Britain.

21 The Government, which has consistently emphasised the importance it attaches to the greater use of regional airports, has given particular consideration to the representations which have been made. In an area where facts and forecasts are more

(^{(1)}) Propensity to fly is the number of international flights by UK residents in a particular year with origins and destinations in a particular region per head of population in that region. than usually uncertain, the Government considers that particular caution is necessary in predicting over a fifteen year period the reactions of individuals to various economic stimuli and economic and social trends. Bearing in mind that at the present time 80 per cent of terminating passengers at London airports have origins and destinations in the South East, any forced diversion of traffic, to have a significant effect on air traffic demand in the South East, could involve the imposition of substantial charges on passengers using London airports. The Government rejects the suggestion that the air transport industry should be subject to the damaging restrictions on its operations, which would be the outcome of the forced diversion of traffic to regional airports.

Nevertheless, the Government believes that there are a number of ways in which a greater role for airports outside the London area can be achieved. First, the Government considers that the pursuit of a coherent airports policy should make a positive contribution to an overall increase in traffic from the regions outside the South East. A proportion of those passengers presently using the London airports, but with origins and destinations outside the South East would be prepared to use airports elsewhere if the right services, at the right time, and with the right frequency were available. Such services are more likely to be commercially viable if they are operated from a limited range of airports. The avoidance of wasteful competition between regional airports, if this can be assured, should provide some incentive to airlines to mount services from the more important regional airports. Secondly, it should be possible to achieve a greater use of regional airports by chart and leisure traffic. Leisure trips, and particularly inclusive tours by United Kingdom residents, already show a more even distribution of origins and destinations than other services and there could be scope for greater market development outside the South East. Tour operators should become increasingly aware of the advantages of providing services from the regional airports, and perhaps also for the most popular destinations from local airports. Thirdly, incoming leisure traffic, although a high proportion continues to travel by sea, is likely to be the fastest growing sector of air travel. The great majority of foreign visitors come to London, but nearly half their time is spent in other parts of the country and the British Tourist Authority and other tourist boards are already following policies designed to spread tourism more widely. Furthermore, the choice of London as the main base for foreign leisure visitors may decline as the number of visitors rises, congestion in the London area increases, and the relative price advantage of other parts of the country becomes more attractive.

The London area airports handle an even higher percentage of the country's international air cargo than of international passengers, although the proportion of cargo with origins or destinations in the South East is lower than for passenger traffic. However, the fact that over half the cargo at Heathrow is carried on passenger flights, together with the attractiveness of the greater frequencies and range of destinations at the London airports, the significant economies of scale available by concentrating traffic at a small number of airports, and the practice of moving cargo by road from regional airports to London airports, limits seriously the scope for diverting cargo to regional airports.

24 It has been suggested that an all cargo airport should be established outside the South East, but this suffers from the same fundamental difficulty of the close links between cargo and passenger traffic. The Government does not consider that an all cargo airport is a practicable proposition at this time. The attraction back to regional airports of cargo traffic at present travelling through the London area airports, must depend primarily on the growth of international passenger services from regional airports. In view of the economies of scale in cargo handling facilities and the need for frequent services and a wide range of destinations, there is a clear need for air cargo activities outside London to be concentrated at a small number of airports. It will be the Government's policy therefore to encourage the provision of adequate freight facilities at those airports identified as having a significant role in the national airports strategy.

25 Paragraph 18 emphasised the need for co-operation among all those concerned if a national airports policy is to be effective. This will be particularly important in enhancing the role of regional airports and the Government will seek to co-ordinate this co-operation. In the case of the regional airports it will be the Government's objective to promote the changes outlined in paragraphs 22 and 24, but results will take some time. A switch in traffic from the South East to other areas of Great Britain is likely to develop over the period to 1990, but it will not avoid the need for additional airport capacity in the London area. AIRPORT CAPACITY LIMITATIONS

26 Within the consultation process many local authorities drew attention to the need to avoid in the future the "creeping expansion" of airports which they have contended has been a characteristic of the past and to establish "ceilings" on the growth of particular airports. This would provide the local authorities with a firm basis for their urban development, infrastructure planning and related policies, and at the same time contain the environmental impact of airport development and air transport operations. There were suggestions that these "ceilings" should be defined by reference to passenger and cargo throughputs, air transport movements(1), numbers employed at the airport, or levels of aircraft noise.

27 The Government recognises these arguments. However, with the growth of air traffic, the future level of noise disturbance and many other factors inevitably uncertain and with the current economic situation imposing tight constraints on public expenditure, airport capacity must be provided only in so far as demand can be foreseen with reasonable confidence. The imposition of rigid quantitative limitations on the capacity of airports would not be compatible with that approach, neither would it be practical nor necessarily useful to those affected by airport development. If limitations below the capacity of airports were established in terms of the number of passengers or aircraft handled in a year, it is not easy to visualise how operations could be sustained and the credibility of the ceilings maintained, when the prescribed limits had been reached.

(1) An air transport movement is a landing or a take off by an aircraft operating a scheduled or non-scheduled service. The rates of technological development and design changes in airports in recent years have demonstrated the difficulties in attempting to predict the anticipated capacity of separate elements of an airport's infrastructure.

While this suggests the need for a step by step approach to airport development, the Government is anxious to respond to the arguments which have been advanced and to provide some reassurance of the kind local authorities are seeking on the ultimate capacity of airports. The Government therefore accepts that limits on the development of airports must be an important part of its strategy throughout Great Britain. The Government believes that this can best be achieved by a combination of restrictions on the number of terminals that can be provided at an airport; through arrangements for the monitoring and development of future airports policy, which will involve the local authorities; and through the modification of the British Airports Authority (BAA) General Development Order (GDO) planning provisions, particularly as they relate to terminal developments. The strategy presented in this White Paper incorporates each of these elements.

FINANCE AND OWNERSHIP

Policy on the provision of Government financial support for airport development, as well as ownership, was laid down in the 1961 White Paper. This envisaged that the air transport industry should become self-sufficient in the longer term. The White Paper recognised that a number of small aerodromes, notably in the Highlands and Islands of Scotland, were essential to the economy and social welfare of the areas they served, that they were never likely to pay their way and that they might need to be supported by means of a direct subsidy. The White Paper also recognised that some financial assistance from the Exchequer might be justified for a period, where an airport served a national as well as a local need, and where the cost of running the airport would place an unduly heavy burden on local resources. The Government does not consider that there is any justification for air transport facilities in general to be subsidised by the taxpayer and the ratepayer. Consequently, while it accepts the need, on social grounds, to secure the continued operation of a limited number of small aerodromes, particularly in the Highlands and Islands, which provide an essential service to the local community but which are not likely to become viable in the foreseeable future, the Government considers that the air transport industry has now advanced to the stage at which new commitments to financial assistance from the Exchequer for airport development, or for the acquisition of airports, will only be justified in wholly exceptional circumstances.

30 The 1961 White Paper concluded that the Gateway airports should be owned and managed by a separate airports authority, and the British Airports Authority was subsequently set up to own and operate the principal international airports at Heathrow, Gatwick, Stansted and Prestwick. Part 2 of the consultation document suggested that in the light of both the 1961 White Paper and the possible future development of the airports system, the role of the BAA might be expanded by the Authority's acquisition of the principal airports which at present it does not own and operate. A number of advantages of such a policy were put forward. First, that the longer term development of gateway international airports would require the sort of airport management, technical and operational expertise which, in the case of local authority owned airports, may impose demands on financial and other resources beyond the compass of the present owners. Secondly, that consistent financial, management and investment policies for major international airports would be an important part of a national airport strategy and common ownership might facilitate this. Thirdly, the concentration of activity at a number of airports might be given encouragement by ownership by the British Airports Authority.

31 In the course of the consultations, those authorities concerned with airports which seemed likely to be candidates for acquisition by the British Airports Authority were for the most part opposed to or had reservations about losing control of their airports. While recognising the need for a national policy towards airports they emphasised the widespread opposition to over-centralisation and drew attention to the acceptance in the consultation documents that the local authority owned airports have been efficiently operated. It was also pointed out that there was advantage in local responsibility and control and responsiveness to local needs. Finally, it was argued that consistency of airport authority policies would derive from the formulation of a national policy and did not depend on ownership by the British Airports Authority.

32 In the light of the views expressed during the consultations, the Government has concluded that a coherent airports policy derived from the framework provided by this White Paper, is not dependent on major changes in ownership. Local authorities will, of course, need to take into account the implications of the Government policy set out in paragraph 29. In circumstances where there is agreement on the desirability of BAA ownership between the local authority owners concerned and the BAA and where this would be consistent with the Government's strategy, the Government will consider proposals made for changes in ownership. In such cases the Government will attach particular importance to ensuring an effective local voice in the operation of any airports which the BAA might acquire.

33 Losses at local authority airports in England and Wales are currently running at £5-6 million a year. While the subsidies for some Highlands and Islands services are a particular exception the Government sees no general justification for subsidising airports and air services. At the airports which will remain under local authority control the Government will continue to urge economies and the application of policies aimed at reducing financial losses as effectively as possible. In particular, as a general rule the Government will expect proposals for improving these airports to be postponed until the economic situation allows some growth in local authority expenditure.

AIRPORT CHARGES

34 Part 2 of the consultation document suggested that one factor contributing to losses at regional airports had been the adoption of uneconomic charging policies. It had been argued that the major airports in Great Britain were part of a common system to which common airport charges should be applied. During the consultations a number of airport authorities expressed their opposition to increased charges for air navigation services by the Civil Aviation Authority, which, they pointed out, were very much higher at regional airports than at airports in the London area and thus were reinforcing the existing pattern whereby landing and other charges at the BAA's London airports are generally lower than those elsewhere. The regional airport authorities contended that differential increases of this kind were not consistent with the Government's wish to encourage the growth of traffic at regional airports.

The Government's consideration of these matters has been influenced by three principles. First, the Government does not consider that air travel generally should be subsidised by the taxpayer and ratepayer and believes that charges should reflect the cost of providing airport services. Secondly, airport revenues should be adequate to provide for the continued existence, including replacement and a return on capital, of the facilities. Thirdly, and within these principles and the constraints of anti-inflation and competition policy, the setting of airport charges should remain a matter for airport managements. In consequence, the Government considers that the substantial deficits which have been incurred at some airports are consistent with the principle that air travel should not be subsidised by the non-travelling public. It rejects any suggestion that exchequer subsidies should be available generally to support the operation of airports.

It is recognised that since airports have a high level of fixed capital, average unit costs are very dependent on traffic levels and this can give large established airports a considerable advantage. Moreover, it may often be difficult to define the marginal costs of providing airport services, particularly where these are supplied centrally or where there are large overhead costs. However, the Government is not convinced that airport landing and related charges are a material influence on the level of traffic at an airport. They represent a very small proportion of total aviation costs and the extent to which airlines have a choice of airport is frequently over-estimated. Thus, while differential airport charges may be of some significance in the competition between airports serving a similar catchment area and in influencing the spread of traffic between peak and off-peak periods, the effect on the attractiveness of the regional airports in general is negligible.

37 The Government is conscious of the difficulties caused by the recent large increases in charges. It recognises also the criticisms of the diversity of charges with airport landing fees, which are often themselves complex, being supplemented by charges for air navigation services, security and aerodrome licensing. It has been suggested that this multiplicity of charges should be replaced by a simplified charging system. The Government understands the force of this argument but it believes also it is important that the justification for particular charges should be understood and that they should be kept generally in line with costs. Charging systems should be a matter primarily for airport managements, and the other providers of services. However, the Government will keep aviation charges under review to ensure, amongst other things, that the policies adopted are generally consistent with the Government's overall airports strategy.

FUTURE DEVELOPMENT OF POLICY

38 The consultations revealed considerable anxiety about possible longer term airport developments if the growth of demand, particularly in the London area, does not sooner or later begin to level off. Concern on this question is understandable, but the problem flows from uncertainties which are inherent in forecasting air traffic demands and translating these into acceptable airport developments. In these circumstances the Government acknowledges that a necessary part of any airports strategy will be to maintain close liaison with local authorities and others concerning the future of particular airports. Moreover, the roles envisaged for different airports may change over time and in the London area, in particular, it will be necessary to consider the provision of additional capacity either at existing airports or at a new airport in the not too distant future.

39 It will be the Government's intention to continue to consult those concerned with the development of airports policy in the longer term. In this connection a number of local planning authorities, mainly through the Standing Conference on London and South East Regional Planning, have represented that they should be more closely associated with the identification of future airport development options that may figure in future consultations. The Government recognises the particular interest of the local planning authorities and intends, therefore, to discuss with the local authority associations an appropriate formal structure that will allow these interests to be taken into account in the formulation of advice on the longer term options for airport policy. THE FRAMEWORK

40 The recent Transport Policy White Paper (Cmnd 6836) announced the setting in hand of a study of the longer term demand for domestic inter-urban public passenger transport by rail, bus and air, with a view to improving co-ordination of operators' pricing policies and investment plans. Investment in airport capacity is primarily needed in response to growth in international air traffic, and to this extent the study will have only limited relevance to the issues dealt with in this White Paper. However, the study will provide a useful contribution to the development of forecasts of domestic air traffic over the next 10 - 20 years. The planning of airport facilities to meet air transport demands must proceed in concert with developments in domestic surface transport and the Government will ensure that the Departments involved continue to work closely together in this area of planning.

THE FRAMEWORK

41 Within the need to determine how the demand for air transport in South East England can be accommodated and how airport facilities in other areas of Great Britain can be used more extensively, the airports strategy framework, involving the division of airports into four broad categories, will be based on six guidelines.

(i) The rationalisation and concentration of the principal air services at a limited number of airports outside the South East.

(ii) Acknowledgment of the need for flexibility in policy rather than the adoption of a rigid plan for all airports. (iii) The development of policies on air service licences and permits, on the expansion of airports, and on planning and related matters consistent with airports policy.

(iv) Recognition that the diversion of traffic to regional airports is unlikely to have any significant effect on the demand for airport capacity in the South East.

(v) Acceptance of the need to identify the limits of an airport's development.

(vi) Acknowledgment of the need to develop further the process of consultation on airports strategy.

Basic to the application of these guidelines will be the principle that air transport facilities should not in general be subsidised by the taxpayer or ratepayer. SECTION 2: AIR TRAFFIC FORECASTS

INTRODUCTION

42 In assessing the demand for airport capacity, and in determining the airport developments which might be required, might be provided and might be acceptable, it is necessary to quantify the level of demand. Because of the lead times involved in the provision of major additions to airport capacity, it is essential to provide forecasts of passenger and cargo demand covering the period 10 to 15 years ahead. Forecasting over so long a time scale, whether of air transport or of any other area of economic activity, involves considerable uncertainties and the basic forecasts are no better than the assumptions on which they are based and the methodology adopted. The methodology used for the forecasts in the consultation documents produced results which were not significantly challenged during the consultation process. Nevertheless, it is important, and it will be the Government's intention to monitor the present forecasts in line with the development of traffic, to keep the assumptions and methodology under review, and to prepare forecasts for the late 1990s and beyond. The passenger traffic forecasts prepared for the Maplin Review and the consultation documents were based on the traffic levels of 1972 and covered the period to 1990. Actual traffic levels since 1972 reached a peak in 1973 followed by a recession in 1974, which interrupted a continuous pattern of growth since 1945. Traffic began to recover in 1975 and by 1976 had exceeded 1973 levels. The traffic levels during these years are shown in Table 1.

Table 1: Terminal Passengers at Airports in Great Britain 1972-76

| | 1972 | 1973 | 1974 | 1975 | 1976 | |----------------------|------|------|------|------|------| | Heathrow | 18.3 | 20.3 | 20.1 | 21.3 | 23.2 | | Gatwick | 5.3 | 5.7 | 5.1 | 5.4 | 5.7 | | Stansted | 0.3 | 0.2 | 0.2 | 0.2 | 0.3 | | Luton | 3.1 | 3.2 | 2.0 | 1.9 | 1.8 | | Total London Airports| 27.0 | 29.4 | 27.4 | 28.8 | 31.0 | | Other airports in | | | | | | | England and Wales | 7.3 | 8.3 | 7.4 | 7.7 | 7.8 | | Scottish airports | 3.6 | 4.1 | 4.0 | 4.2 | 4.8 | | Total Great Britain | 37.9 | 41.8 | 38.8 | 40.7 | 43.6 | A REVIEW OF THE FORECASTS

Since the preparation of the forecasts for the consultation documents, a review of the assumptions and the methodology has been carried out. This has involved a reconsideration and re-estimation of all the main assumptions used in building up the national forecasts and an attempt to establish a more comprehensive explanation of past growth. Taking this work into account, revised forecasts for Great Britain have been prepared and these are shown in Table 2. The base year has been updated from 1972 to 1975 and forecasts have been produced for five year intervals up to 1990. The position beyond 1990 has also been considered. Growth in traffic is expected to continue, but the prospects for the 1990s and beyond are a matter of particular uncertainty especially in view of the developments discussed in paragraphs 47-49.

TABLE 2: Air Passenger Demand in Great Britain

| | 1975 | 1976 | 1980 | 1985 | 1990 | |----------------|------|------|------|------|------| | | Low | High | Low | High | Low | High | | London Area | | | | | | | | International | 24.9 | 26.8 | 32.4 | 37.1 | 46.3 | 57.1 | | Domestic | 3.9 | 4.2 | 4.3 | 4.8 | 5.1 | 6.4 | | Regional Airports | | | | | | | | International | 5.3 | 5.6 | 6.2 | 7.3 | 8.8 | 11.6 | | Domestic | 6.6 | 7.0 | 7.0 | 7.9 | 7.9 | 9.7 | | Total Great Britain | | | | | | | | International | 30.2 | 32.4 | 38.6 | 44.4 | 55.1 | 68.7 | | Domestic | 10.5 | 11.2 | 11.3 | 12.7 | 13.0 | 16.1 | | Total | 40.7 | 43.6 | 49.9 | 57.1 | 68.1 | 84.8 | The main changes resulting from the review of the earlier forecasts are a somewhat lower overall expectation of growth in the period up to 1990 and a narrowing of the range between the low and high forecasts. The most significant reduction occurs in the high end of the forecast range. These changes result partly from revisions in the assumptions for economic growth and fuel prices and partly from the reassessment of the price and income elasticities. A more critical review of the compatibility of the various assumptions has also been carried out, the results of which have led to a narrowing in the range of forecasts.

Within the air traffic forecasts, the proportion of passengers expected to use the London area airports is of particular significance, since it is there that the main capacity problems are expected to arise. Table 3 analyses both the traffic in 1975 and the forecasts for the London area in terms of the nationality of the passengers and the purpose of their journeys. The forecasts for international traffic have been arrived at by assuming for the London airports as a whole a constant share of the total Great Britain traffic in each passenger category. The forecasts and particularly the domestic forecasts, take account of competition from surface travel. The assumption of a constant share in each category of international traffic, although it leads to small fluctuations in the total London share of international traffic because of the different rates of growth in the various categories, implies a fairly stable 80 per cent share for the London airports up to 1990. Overall, with the addition of domestic traffic the London area airports share of total traffic could rise slightly over time on these assumptions. The realism of a constant share assumption for international traffic is open to question. The London area proportion might fall over time, as the attraction of the other regions to foreign tourists and businessmen, the propensity to fly in the other regions, and the availability of services at regional airports, increase. However, there is as yet no evidence of any clear trend in this respect and, while the Government accepts that this proportion could change, it is prudent for forecasting purposes to retain the assumption that the proportion of international passengers using the London airports will remain stable.

Table 3: Forecast International & Domestic Passenger Demand at London Area Airports

| Period | International | Domestic | Total | |--------|---------------|----------|-------| | | UK | Foreign | | | | Inclusive Tours | Other Leisure | Business | Leisure | Business | | | 1975 | 4.5 | 4.7 | 2.5 | 10.2 | 3.0 | 3.9 | 18.8 | | 1980 Low | 4.8 | 5.8 | 3.5 | 14.1 | 4.2 | 4.3 | 36.7 | | High | 6.5 | 6.2 | 4.0 | 15.5 | 4.9 | 4.8 | 41.9 | | 1985 Low | 6.9 | 7.9 | 5.0 | 20.7 | 5.8 | 5.1 | 51.1 | | High | 11.3 | 8.4 | 6.5 | 22.9 | 8.0 | 6.4 | 63.5 | | 1990 Low | 8.2 | 9.9 | 6.9 | 27.1 | 7.9 | 5.9 | 65.9 | | High | 15.1 | 11.0 | 10.1 | 32.0 | 12.7 | 8.5 | 89.4 | REALISM OF FORECASTS

47 The inherent uncertainty of any attempt at forecasting has already been acknowledged, but there are two particular areas where some degree of judgement has been exercised and a third to which particular reference should be made. First, the forecasts will be affected if certain air travel markets begin to show signs of 'saturation'. While there is little indication that this point has been reached, there has been considerable debate within the air transport industry on the extent to which the upper limit of market growth can be identified. The rapid rates of growth, such as were seen for Inclusive Tours in the 1960s, represented the successful development of a new market, but the size of this market for leisure travel is limited not only by economic factors, but also by other constraints such as available time and family structure. For these reasons rapid growth in the leisure market cannot be expected to continue indefinitely. This effect has been incorporated into the forecasting model by assuming a decline over time in the sensitivity of demand to price and income changes. As a result, a tailing off in the growth in demand appears in the forecasts, but it has not been possible to identify any clear upper limit. Nevertheless, by the 1990s the effects of saturation may well be significant, particularly at the high end of the forecast range and especially in the South East where market penetration has proceeded further than in other areas of the country.

48 Secondly, there is the question of whether the very large component of foreign leisure passengers forecast in the 1980s will be attracted to and can be accommodated within the London area. Foreign leisure passengers represent a significant proportion of the forecast total international demand at the London area airports in 1990, or around 32 million passenger movements with the high forecast. This would imply that about 16 million leisure passengers will be arriving at and departing from the London area airports in 1990, compared with 5 million at present, and it is likely that a high proportion of them will spend at least some of their time visiting London. The Government is considering the implications which such possibilities could have for tourism policy, but it is already evident that such a demand could not be accommodated in London without a substantial expansion of the existing stock of hotel and other accommodation over the next 15 years. It is unlikely that such expansion would occur without a real increase in the level of hotel tariffs, which would in turn lead to some reduction in tourist demand, and it may be doubted whether there will be the space available in Central London to meet the higher end of the forecast demand. It is also probable that the congestion at the main tourist attractions will lead to some reduction in demand. It is not possible to forecast the precise impact of these effects on air traffic demand, but a reduction in the incoming leisure component for the London area of 10-15 per cent by 1990 might not be unrealistic. This could reduce the high 1990 forecast by up to 5 million passengers.

Thirdly, the possibility must be recognised that there will be an upward trend in oil prices over the next 15 years. Estimates of the timing vary, with some experts predicting significant further movement from the early 1980s. The traffic forecasts assume up to a 50 per cent increase in fuel prices in real terms by 1990. If fuel prices were to exceed this level there would be some further reduction in demand for air travel.

CARGO FORECASTS

Although the volume of United Kingdom trade carried by air is small, amounting to less than 1 per cent of the total, the value is high. Over the past 15 years the value of United Kingdom trade by air has increased from £526 million, representing 6 per cent of the total to £3,564 million in 1976 or 15 per cent of total United Kingdom trade. Growth in air cargo was badly affected by the cut back in trade following the fuel crisis, but there was no fall in air cargo's share of the total value of United Kingdom trade. Over the period to 1990 it is expected that there will be further growth in air cargo and that it will continue to account for a growing part of the value of our trade.

Air cargo is transported both on all-cargo services and in the holds of passenger-carrying aircraft. The development and introduction of wide-bodied jets has increased the space available for cargo on passenger services and has limited the growth of all-cargo services. In recent years all-cargo movements have accounted for a fairly stable 8-9 per cent of the total air transport movements in the London area. In the future, although the tonnage could increase by as much as 6-10 per cent a year, there is not expected to be any major change in the proportion of freight carried on all-cargo movements. SECTION 3: THE AIRPORT ENVIRONMENT

INTRODUCTION

52 The Airport Strategy consultation document emphasised the importance which the Government attaches to the environmental implications of airport developments. Substantial sections of both parts of the document were devoted to the way in which different developments might affect the communities surrounding the airports and many of the comments were concerned with environmental matters.

53 During the consultations some organisations argued that environmental factors should dictate airports strategy, that the Government should decline to meet the demand for airport facilities, or that airports should be sited at a considerable distance from centres of population. Such approaches leave out of account the benefits to be derived from an efficient air transport system and fail to meet the reasonable needs of industry. Furthermore, what are sometimes described as "environmental airports" away from centres of population are by no means universally acceptable as experience in this country and elsewhere has shown. 54. Notwithstanding the predicted reductions in aircraft noise disturbance which were explained in the consultation document, aircraft noise emerged as a matter of widespread concern. The Government recognises the genuine anxieties which exist and, although it remains confident that the introduction of new and quieter aircraft will bring increasingly dramatic improvements in the situation, it will continue to maintain and develop a range of ameliorative measures as an essential component of its airports strategy. In the Government's view the maximum value from direct measures, such as those governing aircraft noise abatement procedures and the noise certification of aircraft, can only be realised if they are supported by firm and widely understood policies covering, among other things, the identification of those airports where the main growth in traffic is to be concentrated; the definition of aircraft flight paths; and the control, under the Town & Country Planning Acts, of residential and other noise sensitive developments in areas subject to aircraft noise.

55. A key role of an airport strategy is to provide a framework for a co-ordinated approach by the many interests who can influence the way environmental problems are tackled. Nevertheless, the consultations confirmed the existence of an apparently inescapable clash of interests, which has appeared in its most acute form when proposals for new airports have been presented. On the one hand, there is a legitimate demand that aircraft noise and congestion should be minimised in the heavily populated urban areas that are affected by the existing busy "city" airports such as Heathrow, Manchester, Birmingham and Glasgow. On the other hand, there is justifiable, and often well articulated, resentment among the relatively much smaller populations who live in areas which retain some rural character and which are seen to be threatened by increased use of airports situated in more open areas. Representations on this score have highlighted particular resistance to the introduction or intensification of aircraft noise in areas which are claimed to have relatively low ambient noise levels; to the imposition of heavy traffic on country roads; and to changes of character in an area that can be brought about by new house building and associated developments needed to accommodate those involved in the running of the airport and in service and related activities.

AIRCRAFT NOISE

56 Not only did the consultations confirm that, of all the problems associated with airports, the disturbance caused by aircraft noise remains the most serious, but they reaffirmed the particular severity of the problem around Heathrow. At present, using the Noise and Number Index (NNI) as a guide, within the 35 NNI contour 2 million people are affected by aircraft noise at Heathrow compared with around 450,000 at all the other principal airports in Great Britain considered in the consultation documents. By 1990 the number of people affected around Heathrow is forecast to decline to less than 300,000 due mainly to the wider use of larger quieter aircraft but even so the problem will still be greater at Heathrow than elsewhere in the country. This has been a major consideration in the development of an airport strategy for the South East of England.

57 Many of the comments received during the consultations drew attention to the alleged shortcomings of the Noise and Number Index as a measure of noise disturbance. The Government accepts that there are deficiencies in the NNI. However, in the absence of an alternative which is as widely accepted, and which will permit a comparative examination of different airports over an extended period, the Government considers that the NNI remains as good a measure of aircraft disturbance as is available. A fundamental change in the system would make comparisons with the past difficult to assess and monitor. Nevertheless, there is general agreement both in the United Kingdom and elsewhere that there would be benefit in the adoption of a uniform scale for the measurement of noise disturbance. It is, therefore, the Government's intention to continue, in consultation with those concerned, to examine possible alternatives to the NNI, including the Scale of Equivalent Continuous Sound Level (Leq). The Leq covers all forms of noise and has certain advantages over the NNI. It would, for example, include helicopter noise which was the subject of particular concern in the consultations, and for which the Government is keen to establish a reliable basis for measurement in order to assess the scale of the problem.

It is accepted that the reaction of individual people to noise varies greatly and this was shown in the surveys from which the NNI was developed. However, for purposes of comparison the reaction of an "average person" has been adopted and in this context the 35 NNI is generally taken to represent a level of "low annoyance" to aircraft noise. It is recognised that outside the 35 NNI contours there are people whose reaction to aircraft noise is more acute than that of the average person and that in consequence they suffer more annoyance. Where complaints suggest that there may be circumstances which exacerbate the aircraft noise problem outside the 35 NNI contour, special investigations will continue to be made. It has been suggested that one of the main reasons for the apparent disturbance caused by aircraft in certain areas some distance from airports is the lower ambient noise levels to be found in those places. While there is a need to balance the impact of aircraft noise, the Government acknowledges that the perception of aircraft noise may be more acute in areas where the general environment is normally very quiet, but this needs to be weighed against the desirability of causing disturbance to as few people as possible. Regardless of the way annoyance from aircraft noise is measured, and notwithstanding the special case of Concorde, the essential conclusion of the work undertaken for the airport strategy consultation documents was that over the next 15 years there would be a marked decline in the degree and extent of disturbance from aircraft noise. Certain of the assumptions on which the noise forecasts were based were criticised in the consultations. It was suggested that the forecasts assumed a rate of introduction for the newer generation of quieter and larger aircraft that was unlikely to be achieved. It was considered that the forecast average number of passengers per aircraft, which through its influence on the number of air transport movements has a significant effect on the noise forecasts, was too optimistic. It was implied, particularly by those concerned with the regional airports which have seen relatively few of the new generation of jets, that these aircraft were not in fact significantly quieter than those currently in use.

The forecasts for the introduction of new aircraft are based not on a simple extrapolation of past trends, but on a detailed analysis of airline fleets including: the ages of existing aircraft; the known retirement plans of the airlines; the likely demands of the world's airlines; and the new aircraft which are being, or are expected to be, developed. Leaving aside for the moment the earlier retirement of noisy aircraft, which the Government is actively pursuing within the European Civil Aviation Conference (ECAC), it is forecast that by the late 1980s all but a small proportion of existing airline fleets will have to be replaced. These replacements will not necessarily be wide bodied aircraft, but irrespective of their configuration they will be required to meet, at least the then current noise certification standards. British Airways is giving greater priority in its fleet planning to the replacement of its Tridents with new, quieter aircraft. The new aircraft would complement British Airways fleet of Trident aircraft, which is one of the quietest of the modern generation of wide bodied aircraft, and a major consideration in its selection would be noise performance. This would produce a significant reduction in noise disturbance in the vicinity of Heathrow and other airports presently served by Trident aircraft.

So far as the noise characteristics of the new generation of jet aircraft are concerned there is no doubt that these show a substantial improvement on earlier aircraft. For example, at the noise certification measuring points under the flight path(1)

(1) Noise certification points are 6.5 km from the start of take-off and 2.0 km from the runway threshold on approach; there is an additional point used in certification tests to the side of the take-off path. a Boeing 707 - 320B would on average register 113 EPNdB at take-off and 116 EPNdB on landing, compared with 97 EPNdB and 103 EPNdB respectively for a Tristar, an aircraft which is 30 per cent heavier. A reduction of 10 decibels is equivalent to halving the apparent noisiness. The trend towards the quieter aircraft which will increase during the 1980s as the earlier jets are retired from service, is already apparent at Heathrow where over 20 per cent of aircraft movements are now by aircraft meeting current noise certification standards.

62 The Civil Aviation Authority will take aircraft noise into account when considering competing applications for a transport licence for services to and from London airports. The Government also takes this problem into account in carrying out all its duties in the civil aviation field.

63 Because of the large number of overseas airlines which operate in the United Kingdom and because so many of the aircraft used are of foreign manufacture, the full benefit from action to reduce aircraft noise can be achieved only through the widest possible international agreement. The Government will, therefore, continue its efforts within the International Civil Aviation

(2) PNdB—Perceived Noise Decibels is a scale of aircraft noisiness as perceived by the human ear, it being more sensitive to some frequencies than others. EPNdB—Effective Perceived Noise Decibels is the PNdB scale with a weighting for pure tones (single frequency tones) and for the length of time for which the higher noise levels are experienced. The EPNdB scale is used in aircraft certification under the rules of the International Civil Aviation Organisation. Organisation (ICAO) to seek agreement on the adoption of progressively more stringent noise standards in particular for new subsonic jet aircraft. New, stricter noise standards will be presented to Parliament for approval as soon as proposals formulated in ICAO have been agreed by the Council of the Organisation, probably early in 1978. These latest ICAO standards will take advantage of the advances that have been made in acoustic technology since the original standards were set in 1969. As with the original standards, the revised standards will apply initially to new types of subsonic jet aircraft, but discussions are now proceeding in ICAO with a view to agreeing a date from which all new production of existing subsonic jet aircraft should conform to the new standards. Developments in acoustical technology are also being kept under review with the aim of setting even more rigorous standards when these become practical and economically reasonable.

Within the framework of the European Civil Aviation Conference, the United Kingdom has been playing a leading part in studies on the scope for restricting the use of non-noise certificated subsonic jet aircraft and for encouraging the introduction of new quieter aircraft. As a result of these studies, the Government proposes to prohibit the use of non-noise certificated subsonic jet aircraft acquired by any UK operator. after the 30 September 1978 and to prohibit from 1 January 1986 the use of all non-noise certificated subsonic jet aircraft on the UK register. These measures will ensure that a large proportion of the aircraft using UK airports in the middle and late 1980s will have markedly better noise characteristics than many current aircraft. Similar measures are expected to be introduced by other States and the Government will continue to seek agreement within ECAC on further measures to promote the development and use of aircraft incorporating the latest advances in noise abatement technology.

65. A number of developments suggest that the average number of passengers per aircraft in the 1990s may be somewhat lower than was predicted in the consultation documents. The pattern is likely to vary as between airports depending upon the type of traffic. For example, at regional airports it is likely that the introduction of wide bodied aircraft will be slower than in the London area because of the lower density of traffic, and that the operation of older generation aircraft may be prolonged beyond the date by which they might be phased out at the London airports and other major aviation centres. The forecasts in the consultation documents took account of this expected pattern of development and it remains true that the general improvement which is envisaged in aircraft noise will be experienced throughout the country. All forecasts involve a degree of uncertainty, from which the assessment of aircraft noise cannot be exempted. In particular, the forecasts as they apply to particular airports are dependent not only upon the assumptions discussed earlier but also upon the routes followed by aircraft from a particular airport and the way in which airlines deploy their aircraft. Since the publication of the noise forecasts in the consultation documents a number of developments have taken place which might alter some of the assumptions on which those forecasts were based. Some developments, such as the slower introduction of new aircraft will tend to reduce or delay the benefits envisaged over the period to 1990. But others will advance the expected improvements and international agreement on restricting the use of the older aircraft would accelerate the process still further. At Heathrow where the proportion of noise certificated aircraft has been rising steadily and is now over 20 per cent of the total, passenger traffic increased by nearly 13 per cent between 1973 and 1976, but air transport movements decreased by over 4 per cent. These developments give some expectation of a trend which will spread to other airports. In general, the Government remains convinced that by 1990 the noise situation will show a significant improvement on the present position at all airports. The rate of improvement will vary between airports and may be somewhat slower than envisaged previously, but the most marked improvement should be at Heathrow. will take time to develop and it will be some time before a noticeable improvement in the present position can be distinguished. In the meantime, the Government, airline operators and airport authorities will continue to implement a wide range of measures to mitigate the effects of aircraft noise. It is the Government's intention that these various measures should be maintained and that new policies should be introduced where these can be shown to be cost effective and consistent with safety. The Government believes that airport charges which take account of aircraft noise levels could provide a useful economic incentive for the development and use of quieter aircraft. The Government has therefore sought powers to ensure that airport authorities, in their charging policies, are legally entitled to discriminate between noisy and quieter aircraft. The United Kingdom is taking a leading part in discussions in ECAC and the Organisation for Economic Cooperation and Development about the form in which noise related charges could most usefully be introduced at major airports. The Government has proposed that the charge should be related to the aircraft noise measured under noise certification conditions and that it should increase with the intensity of the noise. With regard to existing policies, the Government confirms the continued use of runway alternation at Heathrow and the general policy under which aircraft are required to fly along minimum noise routes. It accepts the arguments which have been put forward emphasising the importance of stability and the need to avoid changes in these routes once they have been agreed. Aircraft movements at night present special problems; from the standpoint of the air transport industry, night operations have some important advantages, particularly in relation to cargo, but for people living around airports, disturbance of sleep seems to be the most disruptive feature of aircraft operations. It has been for some time the Government's policy to obtain a progressive reduction of aircraft noise at night, and at Heathrow and Gatwick, restrictions on movements by jet aircraft at night have been gradually tightened. However, the Government has decided to develop a long term strategy for reducing night noise disturbance by aircraft and in March 1977 it published a consultation document setting out two possible ways in which this might be achieved at Heathrow and Gatwick. These alternatives were either to reduce progressively the number of permitted night flights until they were eliminated, when the airports would be closed at night, or gradually to phase out night flights by noisier aircraft so that the only movements would be by quieter aircraft such as the Tristar, A300B and non-jet aircraft. Having considered the responses to the consultation document, the Government decided to confirm that all flights by noisier aircraft at night would be phased out at Heathrow and Gatwick over a period of about 10 years. The Government recognises that this policy at Heathrow and Gatwick could lead to an increase of night movements by noisier aircraft at Stansted and Luton. It has therefore decided to phase out movements at night by these aircraft at Stansted. The Government expects the management of Luton Airport to take full account of the Government policy on reducing night noise. and to follow suit.

69 Evidence is limited as to how much the quieter aircraft also disturb sleep, although it suggests that these aircraft will disturb the sleep of far fewer people than other types of aircraft. As foreshadowed in the consultation document, "Night Disturbance from Aircraft Noise at Heathrow and Gatwick" the Government has decided to fund a programme of research into the relationship between aircraft noise and sleep disturbance. The results are expected to be available in 1980. Pending the results of this research, quieter jet aircraft such as the A300B, Tristar and non-jets will be allowed to operate at Heathrow and Gatwick within quota restrictions which will be set so as to ensure that there is no overall increase in aircraft movements at these airports at night, and which will increase as the noisier quotas decrease. When the results of the research on noise disturbance at night are available the Government will decide whether to restrict it in any way, or to phase out, movements by these quieter aircraft at any or all of the designated London airports.

70 It will remain important to avoid creating new areas of housing close to the major airports where aircraft noise will inevitably continue to be a serious problem. Advice to local... planning authorities in Great Britain on the control of development in areas which are, or are expected to become affected by aircraft noise is already contained in "Planning and Noise" Department of Environment Circular 10/73, Welsh Office Circular 16/73 and Scottish Development Department Circular 23/73. The Government intends to reaffirm and clarify that advice, particularly with regard to proposals for housing development between the 40 and 60 NNI contours. In the case of existing developments the position can be relieved to some extent by the noise insulation of buildings. Grants for the insulation of dwellings are available at a number of airports. The noise insulation grants schemes for Heathrow and Gatwick closed at the end of 1977, and the Government intends to consider what further measures are necessary.

ACCESS

71 Airports are major traffic generators and questions of road and rail access figured prominently in the consultations.

72 Some of those consulted argued against significant expansions at existing airports on the grounds that these could lead to congestion on the approach roads and also that this would give rise to inconvenience and loss of amenity in the areas affected. These are important considerations and are reflected in the strategy set out in the following Section. Generally, however, the country's airports are well served by the existing and presently planned motorway and trunk road network and the further development of airports envisaged for the 1980s should not call for disproportionate expenditure on new works. In particular, completion of the M25, which has been accorded priority to provide an adequate route around London, will not only help industry and commerce and relieve residential areas of heavy traffic, but will also serve, and link, London's two main airports at Heathrow and Gatwick.

73 There were also representations that central Government funds should be specifically available for road improvements around those airports, particularly Heathrow and Gatwick, which have a more than purely local function. Under the policies set out in the Transport Policy White Paper, the Government will continue to give priority to improving those routes to the major ports and other industrial areas which carry a high proportion of industrial traffic. Within these policies the Government recognises the need for adequate access to airports which are important to the country's international trade and balance of payments. The Government will take this into account in considering schemes for roads for which it is responsible. As far as local transport is concerned however, it must be for the local authorities to assess their priorities in cases where, as a result of airport expansion, improvements to local roads are thought desirable, and to make any appropriate provision in their Annual Transport Policies and Programmes, on the assessment of which the distribution of Transport Supplementary Grant to County Councils in England and Wales is based.

74. It was argued that improvements to public transport to airports could ease possible problems with road access particularly at the times when workers are travelling to and from the airports. The Government agrees that it is desirable to make the best use of public transport. Indeed, with the completion of the Piccadilly Line extension linking Heathrow direct to the London Transport underground system, and with the improvements to the Gatwick rail services, these two airports will be well served by rail. During the consultation process there were suggestions for an additional rail link to Heathrow, for rail services for Stansted and Luton and rail links to other airports including Edinburgh and Prestwick. The commercial feasibility of such possibilities must be initially for British Rail to consider. Other suggestions for improved airport bus services, including services to main line railway stations are matters for the operators concerned together with the local authorities and their Transport Policies and Programmes. There will be a continuing need for airport authorities and public transport operators to work closely together to co-ordinate interchange facilities, involving air, rail and bus services and the provision of travel information. Finally, proposals were made for the use of long distance rail services to promote the diversion of traffic from the London airports to airports outside the South East. Birmingham airport, with a recently constructed station on the main line from Euston serving the airport and the National Exhibition Centre, was suggested for development in this context, and there were also suggestions for a rail connection to East Midlands airport from the St Pancras-Nottingham line. A relatively long rail trip to an airport might be acceptable in cases where the rail journey is in much the same direction as that of the onward movement by air, and where the air passenger has an easily accessible main line railway station. But travel is expensive and future supplies of energy and particularly oil are uncertain. Transport systems which would involve considerable "dead mileage" as well as loss of time through the introduction of additional inter-modal changes, do not make sense. Because the majority of air trips from this country are to the South, the Government does not believe, therefore, that there is much scope for re-routeing genuine London area traffic demands through airports that are located at substantial distances to the north. As far as the 1980s are concerned, it is unlikely that rail transport to airports will play a significant role except at Heathrow and Gatwick and, to a smaller extent, at Birmingham.

In the course of the consultations there were representations particularly from within the South East, that airport developments should not be allowed to cut across the provisions of regional planning strategies and development plans. The Government believes that, while major infrastructure items such as airports can raise conflicts of interest between local regional and national requirements, ways have to be found of reconciling these different interests. This has been one of the purposes of the consultations and of the resulting airports strategy.

Many of the land-use planning consequences of large scale airport expansion result from the employment opportunities provided by an airport and in airport related activities and local services. The prospects of additional employment have been welcomed at airports in the Assisted Areas. Indeed, from most areas of the country, including the London area, there was recognition of the benefits which increased, secure airport employment could bring. But the burden of many of the representations, particularly from the South East, was that demands for housing induced by major airport expansion would threaten villages and valued areas of countryside, many of them enjoying the protection afforded by Green Belt policies.

Reflecting these considerations, the Government's airport strategy has as an important objective the growth of traffic at selected regional airports and particularly at airports in the Assisted Areas. However, the London area airports will continue through the 1980s to cater for the greater part of the national demand for air travel. During the consultations concern was expressed that the existing airports in the South East would expand more or less indefinitely, exacerbate environmental problems and congestion, and cause serious difficulties for the local authorities responsible for planning and servicing the areas affected. Uncertainties about the precise ways in which a large and complex facility such as an airport may be used and operated in the future can never be entirely eliminated. However, the Government believes that its strategy with its acceptance of limitations on the number and size of terminal to be built at particular airports, will meet the situation.

As regards procedures for controlling the development of airports, many local authorities and amenity groups in the South East expressed dissatisfaction at the extent of the developments which the BAA is permitted to carry out at its airports under the Town and Country Planning General Development Order 1977 and the Town and Country Planning (General Development) (Scotland) Order 1975. The Government recognises the efforts which the BAA makes to inform, consult and respond to local interests. Nevertheless, it accepts the logic of the argument that the present provisions of the General Development Order were framed before the advent of large aircraft and when runways were regarded as the main determinant of airport capacity whereas passenger and cargo terminals have now emerged as significant factors. The Government, which intends that control over the provision of major new terminal capacity should be a feature of its airport strategy, is carrying out a general review of the statutory undertakers' provisions in the General Development Order. In the course of this it will be discussing with the BAA and the local authority associations modifications designed to bring under normal planning control the provision by the BAA of major passenger and cargo terminal buildings. In the meantime, the Secretary of State for the Environment, has made a direction under article 4 of the General Development Order making it necessary for the BAA to seek specific planning permission for its proposal to build a fourth terminal at Heathrow.

80 There was some criticism in the course of the consultations about the situation at local authority owned airports where the local planning authority could have a direct interest in any proposed development. The Government is satisfied, however, that the statutory planning arrangements governing local authorities' own development proposals provide adequate safeguards and are operating effectively.

81 Thus all the main airport developments provided for in the strategy will be subject to statutory planning procedures. These allow for public inquiry in cases where this is justified and the Secretary of State for the Environment has already announced his intention to hold such an inquiry into the BAA's proposed Heathrow fourth terminal. The Government believes that airports, as important public transport facilities and sources of employment, should be treated as integral components of regional strategies and of local authorities' plans. They cannot be regarded as developments to be accommodated, if possible, only after other planning considerations have been met, nor can they be imposed on communities without regard for the implications for the locality. With this in mind the Government's objective is to seek to improve the arrangements for consultation over the development of airports policy with the local planning authorities and the aviation interests. SECTION 4: A NATIONAL AIRPORTS SYSTEM

INTRODUCTION

82 Having established the framework for a national airports strategy in Section 1, it is necessary to relate this to individual airports, taking account of the demand described in Section 2 and the environmental considerations outlined in Section 3.

83 One of the main lessons to be learnt from the Roskill Commission on the third London airport is the need for caution in the planning of airports capacity. While the growth of air transport has now resumed, following the recession of the last few years, the decisions which follow relate to the short and medium term up to the late 1980s. It will be necessary to give further consideration to the longer term requirements especially for the London area, but also more widely in co-operation with local planning authorities.

THE LONDON AREA AIRPORTS

84 There are four main airports in the London area: Heathrow which by 1978, when existing redevelopment work is completed, will have a capacity of 30 million passengers a year; Gatwick with a capacity of 16 million passengers when rebuilding is finished in 1978; Stansted capable of handling 1 million passengers and Luton with a capacity of 3 million passengers a year. Heathrow, Gatwick and Stansted are owned and operated by the British Airports Authority, while Luton is owned by the Luton Borough Council. There are other airports in the London area, including Southend, but the Government does not consider that any of these can make any major contribution to the handling of air transport movements though, as is explained in paragraphs 144-151, some of them are expected to fulfil an important role as short haul and general aviation airports.

85 The existing main airports in the London area are geographically conveniently grouped round the capital and well placed in relation to the existing and developing trunk road and motorway network. Additionally, Gatwick is directly served by the British Rail line to Central London and, with the completion of the Piccadilly line extension is connected to the extensive London Transport underground system. Movement between all four airports, and especially between Heathrow and Gatwick, will be facilitated when the M25, which is receiving top priority, is completed. Each of the airports is capable of expansion so that together they could meet the forecast air traffic demand in the 1980s. Hence the London area airports of Heathrow, Gatwick, Stansted and Luton should be capable of development, during the 1980s, as a single category A gateway international airports system. The capacity of about 50 million passengers a year which will be available at these airports from 1978 should be sufficient to cater for demand into the early 1980s, but this will require some redistribution of traffic among the airports and a clearer definition of the roles of the four airports. The most immediate objective is to build up traffic at Gatwick to use the extensive new facilities now nearing completion at that airport, and to relieve the serious congestion which is expected at Heathrow from about 1981. The Secretary of State for Trade announced the Government's policy for the transfer of services from Heathrow to Gatwick on 5 April 1977. This policy, which is crucial to the accommodation of air traffic in the London area at standards which air passengers should expect, requires the full co-operation of the airline operators, for whom the facilities have been provided, and of the other aviation authorities concerned. The need for flexibility has been emphasised earlier, but within this multi-airport system the Government envisages that in general terms Heathrow and Gatwick will develop as the two major international airports for scheduled services, that the principal role for Stansted will be for the handling of long range charter services which are most suited to the airport's facilities, and that Luton will continue to handle short and medium range charter flights, but in future concentrating increasingly on passengers from the South East of England. If Luton Borough Council and the BAA were to agree to a transfer of ownership of Luton airport this would assist the BAA in exercising its major executive and co-ordinating role in the development of the London airports system.

Heathrow

Heathrow is the largest international airport in the world. and it has been an important factor in the development of British civil aviation since the Second World War. It plays a major role in the country's trade and commerce and in international tourism; and it provides directly over 50,000 jobs. Against this background the consultation document put forward, as an option for the 1980s, a scheme aimed at realising Heathrow's full potential as a possible five terminal airport. This would involve the acquisition, by the BAA, of additional land between the runways at Perry Oaks at the western end of the airport and the replacement of the important sewage sludge disposal facilities at present located on this land.

The Government has considered carefully the representations which have been made both for and against this project, which would increase the capacity of the airport to over 50 million passengers a year. Heathrow occupies a restricted site which is markedly smaller than that of most other international airports though these handle significantly less traffic. The Government does not consider that it would be feasible to handle satisfactorily such a volume of traffic at Heathrow or to provide, at a reasonable cost, adequate road, and possibly rail, access. Finally, and although even with such a development the level of noise disturbance could be expected to improve consistently and significantly over the years, noise disturbance at Heathrow will remain worse than at any other airport in the United Kingdom. The provision of a fifth terminal would reduce to some degree the improvement in noise disturbance which those who live in the Heathrow area might otherwise be entitled to expect and cast doubt on the continued practicability of the policy of runway alternation.

89 In the light of these considerations, the Government concluded that Heathrow's ultimate development should not go beyond that of a four terminal airport; a level of expansion which, as was explained when the Government announced, in July 1974, the cancellation of the Maplin project, was called for whether or not Maplin were built. The BAA currently proposes to build a fourth terminal on the south side of Heathrow. This proposal figures in the BAA's Master Plan for Heathrow, published in March 1976, and was the subject of a Background Note, upon which the local planning authorities were consulted in January 1977. As already stated, in paragraph 81, this proposal will be the subject of a public inquiry.

Gatwick

90 With the completion of existing works next year, Gatwick will have a capacity of 16 million passengers a year. The airport's single runway presents an effective constraint on the number of air transport movements and hence on the extent to which Gatwick might be developed, but as the consultation document explained, the capacity of the single runway should be sufficient to sustain the traffic from a second terminal which would raise the capacity of Gatwick to 25 million passengers a year.

91 During the course of the consultations doubts were expressed about the practicability of handling this volume of traffic with a single runway; about the difficulties which would be involved if the runway had to be closed; and about the problem of runway maintenance. There is at present no airport in the world which is handling a throughput of about 25 million passengers a year off a single runway. Indeed, there are very few airports with this amount of traffic. However, the British Airports Authority is convinced that there are no overriding reasons why such levels of traffic should not be accommodated with a single runway. The runway capacity at Gatwick will be 160 thousand air transport movements per year and with the increasing numbers of passengers per aircraft expected in the London area in the period up to 1990 there is no reason to suppose that the longer term utilisation of two terminals at Gatwick would be inhibited by runway constraints. There would remain the possibility that the runway might be obstructed, with the result that the airport would have to be closed. Experience suggests that the probability of this happening is very low, and for this reason, and recognising that other runways are available in the London area, the Government does not consider that expenditure of £10-20 million on the provision of a second runway, which would be required on only rare occasions, would be justified. As far as maintenance is concerned, the British Airports Authority has already carried out major repairs and resurfacing of the runway at Gatwick without any interruption to services and there is no reason to suppose that this cannot continue.

92 Gatwick is within an area which was identified as a major growth area in the Strategic Plan for the South East, though during the consultations there were representations that there could be difficulties in coping with the increased employment and the growth of road traffic which could arise if the BAA went ahead with a second terminal in the 1980s. The rail/link at Gatwick, which provides a frequent train service to and from Victoria already offers a convenient means of transport for a large proportion of air passengers. The Government believes that the opportunity which this affords for an integrated rail/air system should be actively pursued by British Rail, BAA and the airlines concerned.

93 As was explained in Part 1 of the consultation document, while the number of people troubled by aircraft noise at Gatwick is only a fraction of those affected at Heathrow, noise disturbance at Gatwick is expected to increase over the next few years as traffic rises at the airport to utilise the new capacity which will become available in 1978. By the time the second terminal would be required, some time in the mid 1980s, it is forecast that the noise situation around Gatwick would be improved and the additional capacity envisaged would be unlikely to reverse this continuing improvement. Government policy for reducing disturbance at night will ensure that the growth of traffic at Gatwick will not be accompanied by a growth of night disturbance.

94 In the light of these considerations the Government sees no objection to the BAA bringing forward for examination through the appropriate planning procedures proposals for the development of Gatwick during the 1980s as a two terminal airport with an ultimate capacity of around 25 million passengers a year. For various reasons, including the collapse of resident airlines, the existing terminal facilities at Stansted, which have sufficient capacity to handle 1 million passengers a year, have been very much under utilised in recent years. Over time this surplus capacity will be brought into use. Part 1 of the consultation document considered two possible levels of further development for the 1980s: to 4 million passengers a year, which would involve an extension of the existing terminal and associated facilities, and to 16 million passengers a year, which would reproduce at Stansted the level of development now being provided at Gatwick. Both these developments would be contained within the existing boundaries of the airport and would not involve any further runway development.

During the consultations there was a good deal of local opposition to, but also some support for, the development of Stansted. The opposition concentrated on three issues. First, that earlier inquiries had concluded that Stansted should not be developed; secondly, that additional noise disturbance would be unacceptable in an attractive rural environment; and thirdly, that expansion would conflict with the strategic plan for the South East of England and the general planning objectives of the local authorities. The earlier inquiries and the Roskill Commission were concerned with the provision of a massive new airport at Stansted, involving the acquisition of additional land for the accommodation of four runways and capacity for up to 50 million passengers a year. What was considered in the consultation document was a much more modest development which bore little resemblance to the project with which the Roskill Commission was concerned. The support for some expansion of the airport emphasised two points: the need to use more effectively the resources available at, and the potential of, the airport; and the maintenance of existing employment and the additional jobs which would be provided.

97 In relation to aircraft noise disturbance, Stansted is perhaps one of the most satisfactory existing airports in Great Britain at which to accommodate the expansion of air traffic. The consultation document demonstrated that fewer people would be affected at Stansted in 1990 with a throughput of 16 million passengers than at almost any other airport in Great Britain. It indicated that around 2,000 people would be affected by noise at Stansted in 1990 with a throughput of 16 million passengers a year compared with over 200,000 at Heathrow with 38 million passengers. Hertfordshire County Council, in their submission on the consultation document, provided alternative estimates of noise disturbance at Stansted taking into account test and training flights and including less optimistic assumptions concerning the rate of introduction of quieter aircraft. As air transport movements increase test and training flights can be expected to decline, but in any case these alternative estimates do not alter the basic conclusion that, in terms of aircraft noise disturbance, Stansted has significant advantages over other airports.

The Government is conscious that the development of an airport in a primarily rural area could be intrusive and, because of the existing low ambient noise level, cause somewhat greater noise disturbance than might be the case in some other areas. However, as a guide to public policy, the Government does not accept that because populations surrounding existing airports may have become accustomed, to some extent, to high levels of noise, they should be expected to tolerate the imposition of yet further noise disturbance. The Government considers that the principal criterion should be the numbers of people expected to be affected by particular airport developments.

Stansted is well situated, access by the M11 to outer London is good and the aircraft noise situation is superior to that at any other airport in the London area. Moreover, the airport has a good runway and adequate facilities, all of which are grossly under utilised. The Government sees no objection to the BAA bringing forward proposals to develop the airport to accommodate 4 million passengers a year so that these may be examined through the appropriate planning procedures. On the other hand development of Stansted to a capacity of 16 million passengers a year would raise wider issues, including major changes in the planning policies for the area. Therefore, as is explained later in this document, a major expansion of Stansted would be only one of the options to be examined to meet longer term demand in the London area.

Luton

100 Luton airport is currently handling about 2 million passengers a year; although before the recession in air travel the throughput of the airport was in excess of 3 million passengers. With modification and additions to the existing terminal, Luton airport could handle 5 million passengers a year. This growth in traffic was considered in the consultation document, along with a more fundamental redevelopment of the airport to increase the capacity to 10 million passengers a year by the provision of a new terminal.

101 There was support, notably from the Bedfordshire local authorities, for an expansion of the airport's capacity to around 5 million passengers a year. This was influenced by the benefits which were seen to flow from possible increases in airport and service employment in an area that is heavily dependent on industries associated with vehicle manufacture. However, there was also considerable opposition, particularly from Hertfordshire, to any increased use of the airport mainly on the grounds that this would give rise to noise problems and to demands for new housing.

102 Because of its pre-eminent role in handling charter flights, Luton airport has had a greater proportion of night flights, compared with daytime flights, than other airports in the London area. The Government has announced its intention steadily to reduce night time disturbance at Heathrow and Gatwick. It would expect the same situation to obtain at Luton. Generally, as in the case of Stansted, aircraft noise at Luton affects fewer people than at other airports in the London area and the regions. A throughput of 5 million passengers a year, which would build up over a period, should not affect the forecast of an overall improvement in the noise situation, which by 1990, should be significantly better than at present.

103 The Government does not consider that Luton airport is suitable for major development. However, Luton is an integral part of the London airports system within which it fulfils an important role. The Government has concluded therefore that Luton airport should be restricted to a capacity of 5 million passengers a year. As pointed out in paragraph 86, the transfer of ownership of the airport to the BAA would be consistent with its role in the London airports system. Adequacy of proposed developments

104 The developments outlined above would provide terminal capacity to handle approximately 72 million passengers a year. Even at the highest passenger forecast, these terminal developments should be sufficient to accommodate demand up to and beyond the middle of the 1980s and quite possibly it could prove adequate up to 1990.

105 The ability of each airport to utilise its terminal facilities is affected by its runway capacity to cater for the anticipated number of air transport movements. An important element in assessing the level of aircraft movements is an estimate of the average number of passengers per aircraft which depends on various factors, including the rate of growth of traffic, the fleet replacement plans of airlines and the type of traffic handled. The most recent indications are that the progressive introduction of the larger aircraft will be slower than previously anticipated which, with the higher proportion of short haul traffic which is now forecast, will reduce the average number of passengers per aircraft expected at the London area group of airports to between 150 and 165 in 1990. The latest estimates of runway capacity at the four London airports are: 275,000 air transport movements at Heathrow, 160,000 at Gatwick and 120,000 at Luton and Stansted combined. The capacities for Heathrow and Gatwick represent a reduction in the earlier estimates due mainly to new standards of separation between aircraft arriving and departing. However, even assuming that the average number of passengers per aircraft is towards the bottom of this range at each airport, runway capacity should be sufficient to accommodate the maximum levels of development envisaged in the strategy for the 1980s.

106 The CAA has given further consideration to the ability of the air traffic control system to accommodate air traffic demand, not only in relation to runways, but also in respect of the route system within the airspace surrounding the major airports and the radiating air routes. This has revealed no major problems in handling any of the likely airport capacity combinations that might be considered in the period to 1990.

The longer term

107 If air traffic continues to grow, in the longer term additional capacity will be required. No further development at Heathrow beyond a fourth terminal, at Gatwick beyond a second terminal, and at Luton beyond a single terminal, is envisaged. For the longer term therefore the possibilities are a major expansion at Stansted; the development of an existing military airfield as a civil airport for the London area; or the construction of a new airport. The Government will, therefore, seek advice on the longer term provision of airports capacity, taking into account the need to involve the local authorities more closely in the identification of available options. Costs

108 The former Maplin strategy was based on the completion of a fourth terminal at Heathrow and the opening of the first phase of the Maplin development in the early 1980s. This would have made a second terminal at Gatwick unnecessary and would have made possible the closure of Stansted and Luton to air transport movements. The present strategy will rely on a second Gatwick terminal together with Stansted and Luton to provide capacity for some 18 million passengers a year, equivalent to the capacity which would have been provided by building one of Maplin's runways and two of its proposed terminals.

109 The capital cost, exclusive of interest charges, involved in providing a runway and two terminals at Maplin would have been £680 million based on estimates given in the Maplin Review updated to end-1976 prices. This would cover the relocation of the Defence Establishments and land reclamation as well as the costs of new airport facilities. On the same basis, using updated costs given in the consultation document, the present strategy costs for Gatwick, Stansted and Luton would be about £150 million.

110 Additionally, Maplin on a remote and inaccessible site some 50 miles from London would have had little chance of success unless it were provided at the outset with a motorway link at least to the M25 and with a high-speed railway. These, with local road and rail connections, would have cost about £1.10 million at end-1976 prices. The costs of any road and rail improvement schemes that might be called for in connection with increased use of Gatwick, Stansted and Luton would not be significant in comparison with the costs of access to Maplin.

AIRPORTS OUTSIDE THE SOUTH EAST

Whereas the requirement in the London area is for additional terminal capacity to accommodate the demand, outside the South East of England and in Scotland and Wales the problem is to achieve a more effective use of the existing facilities. Bearing in mind the relative demands in the catchment areas, the Government considers that there is no scope for more than two gateway international airports (Category A), at Manchester and Glasgow/Prestwick, outside the South East during the period to 1990.

Central England

After the South East, Central England, which is taken to include the Merseyside, Manchester, Yorkshire and Birmingham conurbations, represents the largest catchment area for air traffic in Great Britain. The Government considers that in the 1980s the area should be able to sustain one international gateway airport and that it should be at Manchester.

113 At the present time Manchester airport, which is a major base for British Airways and used by many international airlines, is handling about 2½ million passengers a year. By 1990, and with the implementation of the policies envisaged in paragraphs 22 and 24, it is forecast that throughput might increase to around 6 million passengers. The existing terminal facilities at Manchester and a single runway should be adequate to accommodate this level of traffic. The state of the present runway at Manchester is giving some cause for concern and consideration is being given to whether, and if so how, it can be strengthened and improved. It is possible also that a limited extension of the runway may be required to enable the airport to fulfil completely its role as a category A airport.

114 During the consultation process, particular attention was drawn to the future of Liverpool airport. It was suggested that air traffic in the North West of England might be distributed between Manchester and Liverpool airports; that the two airports might be owned and operated together by a consortium of the relevant local authorities; that Liverpool airport might be redeveloped with a new passenger terminal, control tower and related facilities alongside the new runway, when the "old" airport could be disposed of for non-aeronautical purposes; or that Liverpool airport might be placed on a care and maintenance basis.

115 The basis of the Government's airports policy is that rationalisation of the facilities outside the South East of England, and concentration of air services at a limited number of airports, are likely to be among the most effective ways of seeking to redress the balance in air transport between the South East and the rest of Great Britain. The Government does not consider that the allocation of traffic between Manchester and Liverpool and common ownership of the two airports is likely to assist this objective. In the Government's view it is more likely to result in lower frequencies and a more limited range of services for the North West while not guaranteeing a viable future for Liverpool.

116 The Government believes that Liverpool airport should fulfil a local role as a category C airport providing some scheduled feeder services, notably to Ireland and the Isle of Man and perhaps to London and other major centres in England, Scotland and Wales; some charter services to the more popular destinations; and facilities for business and general aviation for Merseyside. In such a role the Government does not envision that Liverpool airport would be handling more than 1 million passengers a year by 1990. The immediate future of Liverpool airport must be a matter for the local authorities concerned. Redevelopment, as envisaged in paragraph 114, might have some attraction, but this would have to be considered on its commercial merits and not on the assumption of Government financial support.

117 There are two main airports in the Midlands: Birmingham and East Midlands. Birmingham airport, which handles over 1 million passengers a year, is long established, is well sited in relation to the national motorway and rail systems and the National Exhibition Centre and is a base for British Airways. Industry and commerce in the West Midlands has an important need for air communications and with the large population of the area there is likely to be a growing demand for a wider range of scheduled and charter services. On the other hand, the airport occupies a restricted site, and with built up areas to the north and west has difficult aircraft noise and environmental problems which have been the subject of extensive representations. Moreover, at times, the existing terminal is seriously congested and improved terminal and related facilities, which could be costly, would be required to accommodate the forecast growth of traffic in the 1980s. The local authority owners are presently considering proposals to increase the capacity of the airport.

118 East Midlands airport, although somewhat further from the main concentration of population in the Midlands, is also well sited in relation to the motorway network and has an important industrial and commercial catchment area. Fewer people are affected by aircraft noise than at Birmingham and the airport's modern construction lends itself more readily to expansion than Birmingham airport. However, East Midlands does not have at present the nucleus of domestic and short haul international services which are provided already from Birmingham, and a build up of traffic from the present level of nearly 600,000 passengers a year might be somewhat slower than at Birmingham.

Bearing in mind the limited scope for diverting traffic from the London area, the Government does not consider that the Midlands could sustain a category A airport in the period up to 1990. However, the Government has concluded that there is likely to be sufficient demand for air services in the Midlands to justify both Birmingham and East Midlands airports fulfilling the roles of category B airports in the period up to 1990. In the light of the existing division of traffic, and subject to the provision of additional terminal capacity, Birmingham, with a greater proportion of scheduled services, might be handling between 2 and 3 million passengers a year by 1990. At the same time, and with some modest extension to the terminal and other facilities, East Midlands, with more emphasis on charter traffic, might be handling about 1½ million passengers a year. 120 In the longer term, if air traffic continues to grow, and develop more strongly in the regions outside the South East, either East Midlands or Birmingham could be expected to develop into a Category A airport. In view of the restricted site and environmental problems at Birmingham, East Midlands might have the greater potential to assume that role. It will be important to see how the two airports develop into the 1980s.

121 Finally, in the Central England area, consideration must be given to Yorkshire and Humberside and specifically to the position of Leeds/Bradford airport. The limited length of the runway at Leeds/Bradford places a serious constraint on the aircraft which can use the airport and the services that can be operated. For long haul services Yorkshire and Humberside will continue to be served by Manchester and the London airports. The feeder service to London is at risk because of runway limitations which also affect the provision of short haul scheduled and charter services which are forced therefore to use other airports. Some of this traffic may use Manchester, or East Midlands, or the airports in the North East, but an important part of it goes through the London airports. The Government does not consider that the demand is such as to justify the massive expense which would be involved in the provision of a new airport in Yorkshire and Humberside. However, it considers that Yorkshire could sustain a category B regional airport. The Government does not envisage an extensive role for such an airport within a national strategy, but for Leeds/Bradford airport to meet this requirement would involve an extension of the existing runway. Consideration of this would be in the first instance a matter for the local authorities.

At the Central England airports the main problems of aircraft noise disturbance are at Manchester and Birmingham where at present levels of traffic more people are affected by noise than at any other airport in Great Britain with the exception of Heathrow, Gatwick and Glasgow. At both Manchester and Birmingham airports, and at traffic levels which now seem realistic, a significant improvement in the noise situation is forecast between now and 1990. The concentration of air services at a limited number of airports outside the South East should assist this process to the extent that it encourages the substitution of new, larger quieter aircraft for the smaller, older and noisier aircraft which might otherwise be used. Nevertheless, the Government recognises that aircraft noise is intrusive wherever it is; that some regional airports already experience far more noise disturbance than some airports in the London area; and that there is no justification for relieving the South East airports, particularly Gatwick, Stansted and Luton, by imposing an increased noise burden on, for example, Manchester and Birmingham airports. The introduction of new quieter aircraft and the action being taken to impose stricter noise certification requirements will benefit regional airports. as well as those in the London area, although the rate of improvement may be somewhat slower.

Apart from Manchester, Liverpool, Birmingham, East Midlands and Leeds/Bradford airports which have been considered already there are a number of other airports in Central England such as Blackpool, Coventry, Humberside and Norwich. The Government does not envisage a major role for any of these airports within the national airports system. Norwich, and perhaps Blackpool, can be expected to fulfil a category C role and Humberside may also develop as a third level airport. The main purpose of Coventry is likely to be as a category D, general aviation aerodrome.

Northern England

There are three airports in Northern England, at Newcastle, Tees-side and Carlisle. The North East of England presents particular problems where Newcastle and Tees-side airports are only about 40 miles apart. However, unlike the situation in the North West, where Manchester is a very much larger airport than Liverpool, there is not the same disparity in size between the two North Eastern airports. Neither is there the same potential demand. By 1990 it is forecast that there will be about 2 million passengers using the two airports. Newcastle is long established, handles about three times as much traffic as Tees-side, has rather more extensive facilities and is used by British Airways. On the other hand the future growth of Tees-side might generate a substantially increased demand for air services. By 1990 neither airport should have a serious noise disturbance problem.

The Government does not agree, as has been suggested, that steps should be taken to limit the expansion of Newcastle airport to enable Tees-side to catch up. It believes that the North East generally would benefit from some concentration of services at one or other of the two airports, since this would provide both better frequencies and a wider range of services than might otherwise be possible; and it recognises that each airport could sustain some domestic services, particularly a London service, and perhaps some short haul services to Europe. The Government considers that in practice Newcastle has certain advantages over Tees-side, notably as a base for British Airways, and it remains unconvinced that the growth of industry itself will generate sufficient demand to overcome the existing advantage of Newcastle.

The Government does not envisage circumstances in which a category A international gateway airport could be required in the North East of England, or at this stage that a major extension to the runways at either of the airports could be justified. The Government believes that the North East will benefit from a concentration of air services at Newcastle. However, given the facilities which are available at that airport and at Tees-side, and the importance of maintaining good connections from Tees-side for its industrial hinterland, the Government considers that there are valid reasons to support the continuing operation of both airports. It has concluded, therefore, that Newcastle should develop as a category B regional airport and that Tees-side should be a category C airport, with adequate domestic services and, where demand is sufficient, some short haul international services. The Government is aware that discussions are proceeding between the Newcastle Airport Authority and the BAA with a view to the BAA taking over the airport. Recognising the significance of air transport development in the North East, the Government takes the view that this action by the two authorities is consistent with the guidelines in this White Paper.

127 The predominant role of Carlisle airport is as a category D general aviation and training aerodrome. Given its excellent weather record and its remoteness from centres of population it will be the Government's intention to encourage a greater use of Carlisle airport for training. This could relieve pressure on airports particularly in the South East of England where such activities are a considerable burden both on airport capacity and on the surrounding communities. South Wales and South West England

There are five significant airports in South Wales and South West England; Glamorgan, Bristol, and Exeter which can be considered as a group and Bournemouth and Southampton(1) which may also be taken together. The airports at Bournemouth and Southampton are sufficiently close to the South East to have the prospect, identified in the consultation document, of attracting traffic from the London area. Bristol and Glamorgan airports might also in theory take traffic diverted from the London area. However, in the light of the consideration given to regional diversion in Section 1, the Government considers that it would be wrong to assess the roles of airports in South Wales and South West England on the basis of a major transfer of traffic from the South East. Taking this into account, it is unlikely that traffic over this wide area will amount to more than 3 million passengers in all by 1990. In these circumstances there is a danger that the available traffic could be spread very thinly among the airports and thus, as was pointed out by the Civil Aviation Authority in their study of airports in the region, lead to a poorer service particularly on scheduled flights than might be the case if traffic were concentrated at fewer airports.

At present, Glamorgan and Bristol airports handle a

(1) Southampton Airport is within the South East Economic Planning Region, but it covers broadly the same catchment area as Bournemouth Airport and it is convenient to consider the two airports together. similar volume and type of traffic, concentrating mainly on charter services, scheduled domestic flights and a few international scheduled services. It is likely that South Wales, the Bristol conurbation and South West England generally, could sustain one, but not two, category B regional airports. Neither of the two airports is ideally suited to accommodate the demand in both South Wales and South West of England. There is however a significant difference in the facilities available at the two airports. Although few people are affected by aircraft noise at either airport, the consultations showed some opposition to expansion at Bristol. On the other hand, none of the many representations received suggested that Glamorgan airport was environmentally unacceptable. Furthermore, expansion of traffic at Glamorgan would support the Government's regional development policies since the airport is in a Development area, close to a Special Development Area.

At Bristol, the present terminal is no more than adequate for the existing levels of traffic and its development as a category B airport would require considerable expenditure on new terminal facilities and some extension of the runway might also be necessary as well as improvements to the navigational facilities. In contrast, at Glamorgan the modern terminal is more than adequate, as are the runway and other facilities, to meet all foreseeable demands up to 1990. In the light of these considerations, including the expenditure which would be involved in the further development of Bristol airport and which, among other reasons, would rule out a new airport for Severnaide or the adaptation of Filton as a civil airport, the Government has concluded that Glamorgan should have the role of a category B airport. Bristol airport may continue to fulfil a local role as a category C airport, but this is a matter which the local authorities will wish to consider.

During the course of the consultations it was suggested that a combination of Glamorgan and Exeter airports would meet most satisfactorily the requirements of South Wales and South West England. Whether there should be any close and permanent association between Glamorgan and Exeter airports will be for the local authorities to consider, but given the relative remoteness of Cornwall and Devon, Exeter airport seems likely to retain its usefulness and to expand its role as a local, category C, airport.

Both Southampton and Bournemouth airports fulfil a similar role, and scheduled services to the Channel Islands, to meet a demand from a much wider area than that surrounding the two airports, are of importance. Southampton has a significant advantage over Bournemouth in terms of its location, and it also has a larger catchment area and a more extensive range of services. On the other hand, Southampton airport is privately owned and from time to time there have been doubts about its future. Furthermore, it occupies a restricted site which affords little scope for expansion to enable the airport to embrace a wider role. There is room for further development at Bournemouth airport, but there is considerable local opposition to its expansion. The Government does not envisage any major change in the roles of Bournemouth and Southampton airports or any requirement for significant additional development at either airport. The principal role for any airport in this area is to provide a link with the Channel Islands. The Government considers that in this connection Southampton has certain advantages over Bournemouth, that it should receive preference in the licensing of services to the Channel Islands, that the airport management should be encouraged to maintain and develop the role of Southampton as a category C airport, and that Bournemouth's function will be largely as a category D airport.

During the course of the consultations a good deal of concern was expressed about aircraft noise at Bristol, Bournemouth and Southampton airports, and in relation to the volume of traffic there are a significant number of people affected by noise at Southampton. However, given the limited roles which are now envisaged for Bournemouth and Bristol airports, and the physical constraints on Southampton airport, the Government does not consider that aircraft noise disturbance should be a major problem at airports in South Wales and South West England. Finally, under the Government's devolution proposals, the Welsh Assembly would have responsibility for planning and environmental matters associated with any future airport development in Wales.

Scotland

As the consultation document recognised, Scotland forms a relatively distinct unit in airport planning terms. The scope for diverting London traffic to Scotland apart from traffic with Scottish origins or destinations at present interlining(1) through London, is negligible, and, with the limited exception of the extent to which people in the Borders might look towards the North of England, there is no overlap with the catchment areas of airports in England and Wales. Historically, air travel has been more developed on domestic routes in Scotland than in the English regions. The distances involved and the relative attractiveness of air travel to London, compared with road and rail, have contributed greatly to the growth of Glasgow and Edinburgh airports to become the second and fourth largest outside the London area in 1976, and although the importance of the London route could diminish, this should be more than offset by the development of direct routes to other destinations. In recent years, Aberdeen, Sumburgh and Kirkwall airports have all experienced above average growth.

(1) An interline passenger is one who changes planes at an airport and has no other reason for visiting the airport. in passenger and aircraft movements as a result of the stimulus of oil related activities, and Aberdeen has been the fastest growing airport in the United Kingdom. Finally, the Scottish Highlands and Islands aerodromes, while not so significant in terms of the number of passengers handled, have an important social function in the isolated communities which they serve.

There is no shortage of runway or terminal capacity in Scotland and all the major airports have extensive modern facilities, or are being provided with them by the BAA which owns Aberdeen, Edinburgh, Glasgow and Prestwick airports. The situation in Central Scotland is complex and there is probably a greater excess of airport capacity in this region than anywhere else in Great Britain. It is probable that economies in operation for both airline and airport managements, with consequent benefits to passengers, would result from a better match between capacity and demand. Under the Government's devolution proposals responsibility for airports in Scotland is to be transferred to the Scottish Assembly, subject to agreement on the arrangements for airports operated by the BAA and CAA and to the reservation of functions related to the regulation and safety of civil aviation generally. Ultimately, therefore, longer term policies for airports in Scotland will be a matter for the devolved administration, but the Government believes that it may be helpful in this context to set down at this time its views on airport development in Scotland. Central Scotland

137 From time to time it has been suggested that the rationalisation of the Central Scotland airport system should be achieved by constructing a completely new airport between Edinburgh and Glasgow. Very little support for a new airport was expressed during the consultations, and in the Government's view such a project, which would be extremely expensive, would represent an unjustifiable waste of existing assets. The potential role of the airstrip at Dundee was also examined, but in view of the improved road communications between Tayside and the existing airports, there is no case for expansion of the airstrip beyond the purely local role of a category D general aviation airport. The Government has no doubt, therefore, that the airport needs of Central Scotland should be met for the foreseeable future by the existing facilities at Edinburgh, Glasgow and Prestwick. Within existing policies, Prestwick handles the transatlantic traffic for the whole of Scotland; Glasgow caters for domestic and European services for the West of Scotland; and Edinburgh provides domestic and some European services for the East Coast. However, during the consultations there was some pressure for this division of traffic to be abandoned or modified, and specifically for some Prestwick traffic to be transferred to Glasgow and for Edinburgh, with its modern new facilities, to be allowed to develop more freely and to cater for a wider range of services. With regard to the latter, there is no doubt that in the past traffic at Edinburgh was depressed as a result of the badly aligned runway and the lack of adequate terminal facilities; traffic increased by 20 per cent in the first year of operations with the new runway. Moreover, the increasing importance of Edinburgh as the capital of Scotland and the industrial development on the eastern side of Scotland both suggest that the relative importance of Edinburgh is likely to increase.

138 The respective roles of Prestwick and Glasgow are closely related both to each other and also to Edinburgh. Although an extension of the runway at Glasgow and some other development would be necessary before the airport could handle all long haul traffic, either Glasgow or Prestwick is capable of handling the joint demand anticipated up to 1990. Savings for the airlines and the BAA, and perhaps a better service for Scotland, could be achieved by concentrating services at one or other airport. In this connection, Glasgow airport is better placed for the main centres of population, has already an extensive route network and handles nearly six times as many passengers as Prestwick. On the other hand, Prestwick would not require any extension of its runway, it has a superior weather record to Glasgow and aircraft noise presents less of a problem. At the present time Prestwick fulfils an important role as a diversion airport and as a base for test and training activities. However, if the bulk of its passenger and cargo services were transferred to Glasgow it is difficult to envisage a viable role for Prestwick and the expectation must be that the airport would close. The concentration of services at Glasgow or Prestwick and the ending of restrictions on the use by certain services of Edinburgh airport could in the long run increase air services and produce an overall benefit for Scotland as a whole. However, the closure of Glasgow airport or, perhaps more probably, Prestwick airport could involve wider considerations. The Government takes the view that this is an issue which the proposed Scottish Assembly would wish to examine. In view of this, and the need to study the effects of the new facilities at Edinburgh over an extended period, the Government has concluded that existing policies relating to the allocation of traffic among the three lowland airports should be maintained generally, but that some greater flexibility could be followed in the development of traffic at Edinburgh.

Northern Scotland

The discovery and exploitation of oil in the North Sea has transformed a number of the aerodromes in the Northern part of Scotland, in Orkney and in Shetland, and especially Aberdeen and Sumburgh both of which have experienced very fast rates of growth in recent years. Considerable development by both the CAA and the BAA, supported by the Government, has been necessary at a number of these aerodromes, and further investment will be required at some of them. Until 1975, Aberdeen was operated by the CAA but with a considerable growth of the airport, as a result of oil-related activities, responsibility for it was transferred to the BAA, with its wider experience of airport management and of operating large and expanding airports. A similar situation to that which led to a change in ownership at Aberdeen is now developing at Sumburgh and, to a lesser extent at Inverness and Kirkwall.

The consultation document said that the possibility of transferring responsibility for the 8 Highlands and Islands aerodromes from the CAA to the BAA was being examined. As these aerodromes are of major importance to the communities they serve and in a number of instances vital to the development of the oil industry, the Government wished to assess the need, particularly at those aerodromes used by the oil industry, for wider airport management experience and resources to handle the rapidly growing traffic; to plan and supervise the extensive additional investment required; and to exploit any revenue earning potential. The Government believed it was important also to establish the advantages in terms of the Government's devolution proposals to be derived from associating the Highlands and Islands aerodromes with the four major airports in Scotland as part of the largely autonomous Scottish Airports Division of the BAA. With some significant exceptions, Scottish opinion generally was opposed to any change in ownership of the Highlands and Islands aerodromes; partly because it was thought that the BAA would be insufficiently sensitive to local opinion, but primarily because it was considered that the change could lead to an increase in the cost of air travel in the area. The evidence available to the Government does not suggest that either of these fears is justified. However, given the proposals in the Scotland Bill for the devolution of responsibility for aerodromes, it considers that it is preferable to leave the future ownership and management of the aerodromes for decision by the devolved administration. The Government has concluded therefore that, for the present, the Highlands and Islands aerodromes (with one exception) should remain the responsibility of the CAA.

In the case of Sumburgh which is now in a similar position to that reached earlier at Aberdeen, the Government has concluded that the management problems involved in the handling of the sharp growth of oil industry traffic, in controlling investment at the aerodrome, and in developing the aerodrome's facilities are such that a decision should not be further delayed. Accordingly, it has been decided that Sumburgh should be taken over by the BAA without delay. Expensive facilities have been provided for the oil industry, particularly at Sumburgh, and the Government considers that its traffic should pay a larger and fairer share of the cost of these facilities. The CAA and the BAA will therefore be requested to develop charging policies at the Highlands and Islands aerodromes which reflect this aim.

GENERAL AVIATION

The consultation document "Airport Strategy for Great Britain" was concerned essentially with airport facilities required to meet the demand for air transport movements. This is only part of civil aviation and the Government recognises that general aviation, and within that business aviation, is an important user and in some cases the major user, of airport facilities. In its consideration of general aviation facilities, the Government has been influenced by two main factors: that the accommodation of general aviation presents no problem in terms of the availability of aerodromes outside the South East of England and that its principal concern should be for business aviation which, in the facilities it requires has a close affinity to airline operations. Facilities for private and recreational flying are available throughout the country and, recognising always the need to take full account of the views of local communities, their use and development should continue to be primarily the concern of the local planning authorities.

As in the case of commercial aviation, the main problem facing business aviation is the availability of adequate airport facilities in the South East of England. The Civil Aviation Authority and the Standing Conference on London and South East Regional Planning have been studying this issue and thus have complemented the Government's consultations on airport strategy. They have produced two reports as the basis for consultations with those concerned and for their advice to the Government on aerodrome facilities for general aviation in the South East. In that advice the CAA and the Standing Conference concluded that the existing aerodromes should be able to accommodate the expected growth in general aviation if their facilities were improved and if business aviation were accorded some precedence. over recreational flying, particularly at a number of selected aerodromes.

147 The BAA recognises the importance of interlining to business aviation and it is the Authority's policy to allow provision for business aviation movements at Heathrow and Gatwick. However, with increasing congestion particularly at Heathrow in the peak hours the BAA considers that it should give priority to air transport movements, which utilise scarce resources to the benefit of the greatest number of air passengers and freight. The Government supports the BAA in this policy, but it recognises as a result the need for alternative accommodation for business aviation in the South East, in particular at locations readily accessible to Central London, to industry on the outskirts of London and to scheduled international air services. Following the advice of the CAA and the Standing Conference, based on their studies and the consultations they have undertaken, the Government considers that the airports at Biggin Hill, Leavesden, Luton, Northolt, Southend and Stansted could satisfactorily fill that role.

148 Luton, Southend and Stansted are fully developed commercial airports with the ability to handle all types of business aviation including executive jets. But none of them fulfils the requirement for a business aviation airport close to London and to Heathrow and Gatwick. The CAA identified Biggin Hill and Northolt as meeting this last and most important requirement. Northolt, which is only 5 miles from Heathrow, is owned by the Ministry of Defence and while the Ministry is willing to continue to make the aerodrome available for civil operations, there are environmental and operational constraints, relating to the runway and its proximity to Heathrow which limit the type and number of movements by civil aircraft at Northolt.

In view of the limited extent to which further civil use of Northolt is possible, the CAA and Standing Conference concluded that to accommodate demand from the North and West of London greater use might be made of Leavesden for non-jet business aviation. Leavesden airport which is 25 miles from London and close to the M1 and M25 is owned by the Ministry of Defence and is at present on lease to Rolls Royce Ltd. Their lease expires in June 1978 and discussions are currently being held to decide future arrangements.

In the light of the limited additional use that can be made of Northolt and Leavesden, especially by executive jets, the Government believes that the future use of Biggin Hill is of particular importance. Biggin Hill, which is owned by the London Borough of Bromley, is 15 miles from central London and within 40 minutes of Gatwick and 70 minutes of Heathrow by road. The Government proposes, therefore, to open discussions with the Borough Council and others concerned with a view to establishing Biggin Hill as a major business aviation airport for the London area. Improvements in its facilities would be required and in this role it would become an integral part of the London airports system. In these circumstances the Borough Council may favour a transfer of ownership to the BAA. Flying clubs now at the aerodrome may need to be relocated since these may not be compatible with an extended role for Biggin Hill as a business aviation aerodrome.

A final but important aspect of general aviation is helicopter operations. The Government recognises the need for and the advantages of a heliport terminal in London, which might be operated by the BAA. The Government is anxious that helicopter services to the capital should continue and it will maintain close contact with the operators of such services and the local authorities who lay down the conditions for the use of heliports, both on future developments and the environmental implications of such operations. SUMMARY AND CONCLUSIONS

DEVELOPMENT OF A NATIONAL AIRPORTS SYSTEM

152 The strategy for a national airports policy outlined in this White Paper is based on the recognition that the air transport industry through the provision of speedy and convenient travel makes a valuable contribution to the economy; the principle that air transport facilities should not in general be subsidised by the taxpayer or ratepayer; the need to take careful account of the environmental impact of airport developments; the more effective use of existing airport and other infrastructure resources; the adoption of a flexible approach in planning and development which can be related to the growth in demand; and the importance of consulting those concerned with airports in the development of policy.

153 In the South East, additional capacity is necessary in the 1980s to meet the forecast demand for air travel; in other areas there are underused and loss-making airports. The Government's objective is to achieve a greater use of airports outside the South East, but the diversion of passengers with origins and destinations in the South East to airports in other parts of the country neither makes sense in transport terms nor would it lead to an overall decrease in the numbers of people affected by aircraft noise. The limited scope for diverting passengers from the London airports to those in other regions does not therefore remove the demand for additional airport capacity in the South East of England. However, in the light of uncertainties both in the scale and geographical pattern of demand and the continuing requirement for restraint in public expenditure, there is a need for particular caution in the consideration of projects involving the commitment of vast public resources.

In present circumstances clearly foreseeable demands in the London area should be met by bringing forward proposals for the limited expansion of the existing airports. Outside the London area, air services should be encouraged to concentrate at a few selected regional airports which might thereby be able to offer a range and frequency of service to meet local demand and at the same time provide a stimulus to air travel outside the South East of England.

THE DEMAND FOR AIR TRANSPORT

In 1976 44 million passengers used airports in Great Britain and 31 million of these passed through the four London airports of Heathrow, Gatwick, Stansted and Luton. It is forecast that in 1990 the number of passengers at all airports in Great Britain will be between 86 and 117 million and at the London airports between 66 and 89 million. Two-thirds of the forecast increase is attributed to the growth of leisure traffic. Forecasting over so long a period involves considerable uncertainties, but the continuing rapid growth of leisure traffic in the London area is subject to particular uncertainty, since it involves the ability of London to accommodate ever increasing numbers of tourists, the extent to which foreign tourism can be attracted to areas away from London, and the way in which the domestic demand for leisure flights will develop in the regions where demand has hitherto lagged far behind that in the South East.

The forecasts suggest continued growth after 1990, but the prospects for the 1990s and beyond are a matter of even greater uncertainty. The Government has concluded that:

(1) the present forecasts represent the best available guide for the period up to 1990 but, in view of the uncertainties, it has decided to monitor the present forecasts and keep the assumptions and methodology under review, with a view to the preparation of forecasts for the late 1990s and beyond.

THE LONDON AREA

On the basis of the latest air traffic forecasts the Government has reached or confirmed the following conclusions on the handling of demand in the South East up to 1990.

(2) There is no requirement for or possibility of a new airport and the decision to abandon the Naplin airport project is reaffirmed.

(3) The BAA proposals for a fourth terminal at Heathrow airport to raise the capacity to 38 million passengers a year should be examined at a public inquiry.

(4) Proposals should be brought forward by the BAA for a second terminal at Gatwick airport to raise the capacity to 25 million passengers a year.

(5) Proposals should be brought forward by the BAA to extend capacity at Stansted Airport to handle 4 million passengers a year.

(6) Capacity at Luton Airport should be restricted to cater for 5 million passengers a year.

The four airports together would thus provide a total capacity for the London area of about 72 million passengers. Given the particular uncertainties about the higher end of the range of air traffic forecasts, and the need to avoid the premature and perhaps unnecessary commitment of costly and high risk new airport developments, the Government regards these proposed developments as sufficient for accommodating air traffic. in the London area during the 1980s. The proposed developments at (4) (5) and (6) will, like that at (3) be subject to the necessary planning procedures and these, together with the way in which demand for air travel develops, will be relevant to the order and timing of the various projects. There should be no further expansion of the London airports in the current phase of airport strategy.

In the longer term additional capacity will almost certainly be required in the London area. However, the Government accepts that limits should be placed on the growth of existing airports and has concluded that:

(7) Heathrow's ultimate development would be limited to not more than four terminals;

(8) the proposal for a second runway at Gatwick should not be revived, which effectively limits development at Gatwick to a two terminal airport;

(9) Luton airport is not suitable for development as a major airport to accommodate more than the 5 million passengers envisaged in conclusion (6).

With a continuing increase in the use of larger aircraft and improvements in air traffic control, any longer term provision for the London area should not involve the construction of a four runway airport as envisaged in the earlier Stansted and Roskill proposals. In the light of this, the Government will consider how additional capacity beyond 1990 can be provided. This will include

(10) (a) a major expansion of Stansted; or

(b) the development of an existing military airfield as a civil airport; or

(c) the construction of a new airport.

THE REST OF ENGLAND AND WALES

Outside the South East it is not envisaged that any new airports whether for passenger or cargo traffic will be required. The Government believes that efforts to achieve a greater use of airports outside the South East will be assisted by the development of a coherent airports policy which seeks some rationalisation of the existing pattern of airports and identifies a limited range of airports at which passenger services might be concentrated. In addition, the Government considers that it should be possible to achieve a greater use of airports outside the South East by charter and leisure services catering for British holiday makers travelling overseas and by incoming tourist traffic.

162 The Government has reached the following conclusions relevant to the development of regional airports in England and Wales.

(11) There is no requirement for a new airport outside the South East of England and with the preponderance of cargo carried on passenger aircraft an all cargo airport would not be viable.

(12) Manchester International airport, which is within an Assisted Area, is well located to serve important centres of population and industry and has adequate facilities to meet expected demand until at least 1990. It should consolidate its position as a gateway international airport and as the principal airport outside the South East of England.

(13) There is no requirement for a second gateway airport, but elsewhere in Central England, Birmingham and East Midlands airports, as category B airports, should fulfil important roles in serving the requirements of the Midlands for short and medium range scheduled and charter services. Leeds/Bradford airport should fulfil a similar, though less extensive role, in the smaller catchment area of Yorkshire and Humberside. In the longer term, depending on the development of demand, East Midlands airport may assume a wider role in the national airports system.

(14) In Northern England demand is likely to remain insufficient to justify a gateway international airport. Newcastle airport, as the main regional category B airport for the region, should continue to maintain its existing advantage over Tees-side airport in terms of the amount of traffic and the range of services, but the location of Tees-side airport is such that it can be expected to have a continuing role as a category C airport.

(15) In South Wales and South West England the catchment areas of the various airports are small. Glamorgan airport, with its modern but under utilised facilities, should develop as the category B airport in this area.

(16) Apart from the airports considered in conclusions (12) to (15), no other airport in England and Wales is expected to fulfil a significant role within a national strategy, though a number of these other airports can be expected to continue to cater for local needs as either category C or D airports.

SCOTLAND

163 The Scottish airports can be considered separately, but their future cannot be divorced from decisions on devolution. The four principal airports in Scotland are owned by the British Airports Authority and over the last five years virtually a new airport has been built at Edinburgh, extensive new facilities have been provided at Aberdeen, while Glasgow and Prestwick are well equipped to meet the traffic demand. The Government has concluded that:

(17) there is no requirement for a new airport in Central Scotland;

(18) generally any modification in the roles of the three lowland airports at Prestwick, Glasgow and Edinburgh should be a matter for the proposed Scottish Assembly;

(19) Sumburgh aerodrome should be acquired by the BAA from the CAA;

(19A) the future arrangements for the remaining Highlands and Islands aerodromes should be decided by the Scottish Assembly;

(20) charging policies at the Highlands and Islands aerodromes should be developed to provide that oil related traffic at these aerodromes is not subsidised by the taxpayer. GENERAL AVIATION

164. General aviation, which includes all flying other than the operations of major airlines, is an important user of airport facilities. Adequate provision for private and recreational flying is generally available throughout the country, but business aviation which sometimes requires the runway and navigational facilities of a major airport places an additional demand on the capacity of airports in the South East of England. The Government believes that the requirements of business aviation in the South East call for specific recognition and it has concluded that:

(21) the airports at Biggin Hill, Leavesden, Luton, Northolt, Southend and Stansted should meet the demand;

(22) discussions should take place with the London Borough of Bromley and others concerned with a view to establishing Biggin Hill as the major general aviation airport for the London area and to its possible acquisition by the British Airports Authority;

(23) adequate helicopter facilities should be provided possibly by the British Airports Authority, to meet demand for helicopter services to and from central London. IMPLEMENTATION OF THE STRATEGY

165 The Government will take account of airports policy in issuing permits for scheduled and charter services by overseas operators. With regard to British operators, and similarly, the Civil Aviation Authority in considering applications for new services and the renewal of existing licences will be expected to take account of airports strategy in accordance with the policy guidance which has been given to the Authority.

166 Losses at local authority airports in England and Wales are currently running at £5-6 million a year. While the subsidies for air transport in the Highlands and Islands are a particular exception, there can be no general justification for subsidising airports and air services. At the local airports which will remain under local authority control there will be a continuing need for economies and the application of policies aimed at reducing financial losses as effectively as possible.

167 The Government will consider any proposals put forward by local authorities and the BAA for the transfer of the ownership of airports in the light of the policy outlined in this White Paper. ACCESS

168 Adequate access to airports is an essential requirement and this will be among the factors taken into account by the Departments concerned with road building programmes. Where improvements to local roads may be thought desirable to accommodate increased traffic due to airport expansion, it must be for the local authorities concerned to assess their priorities and make any appropriate provision in their annual local transport programmes, on the basis of whose assessment Transport Supplementary Grants in England and Wales are distributed. In the Government's view, it is desirable to make the best use of public transport, especially the important underground and rail connections available at Heathrow, Gatwick and Birmingham. There will be a continuing need for airport authorities and those responsible for operating public transport services to work closely together.

AIRCRAFT NOISE

169 Disturbance caused by aircraft noise is the most serious problem associated with air transport operations. Over the next 15 years there should be a marked decline in the number of people adversely affected by aircraft noise. However, the Government will continue to develop policies to reduce the impact of this nuisance and to seek international agreement on more stringent noise standards for aircraft. In pursuit of these objectives the Government has decided;

(24) to continue its efforts to find an alternative (30) to fund a programme of research into the relationship between aircraft noise and sleep disturbance;

(31) to reaffirm and clarify the advice to local authorities that new housing developments should not be permitted in areas close to major airports seriously affected by aircraft noise.

PLANNING

In view of the uncertainty relating to the forecasts and the constraints on public expenditure, the Government believes that a step by step approach to airport developments is sensible. Nevertheless, it recognises the concern that was expressed in the course of the consultations that the expansion of existing major airports could continue almost indefinitely, leading to an erosion of the environment and to difficulties for the local authorities responsible for planning the areas affected. Accordingly, the Government has decided:

(32) that limits should be placed on the development of some airports when circumstances make this appropriate and that these should be defined in terms of the number and size of terminals to be built;

(33) to discuss with the BAA, and the local authority method of measuring noise disturbance, which can be fully evaluated and which is generally acceptable;

(25) to prohibit the use of non-noise certificated subsonic jet aircraft acquired by any United Kingdom operator after 30 September 1978 and to prohibit from 1 January 1986, the use of all non-noise certificated subsonic jet aircraft on the United Kingdom register;

(26) to continue to seek agreement within the European Civil Aviation Conference on further measures to promote the development and use of aircraft incorporating the latest advances in noise abatement technology;

(27) to seek powers to ensure that airport authorities can discriminate between noisy and quieter aircraft in their charging policies;

(28) to continue the use of runway alternation at Heathrow and to maintain and stabilise the general policy of minimum noise routes;

(29) to phase out flights by the noisier aircraft at night at Heathrow, Gatwick and Stansted and to indicate to the Luton Borough Council that the Government would expect a similar policy to be applied at Luton airport; CONSULTATION

171 The Government considers that the consultations on airports strategy have made a valuable contribution to the development of airports policy and the decisions contained in this White Paper.

(34) The Government will continue to consult those concerned with airport development including consumers of air services and amenity groups. In view of the particular interests of the local planning authorities an appropriate formal structure will be discussed with local authority associations to ensure that their interests are taken into account in the formulation of advice on the longer term airport options. CABINET

FUTURE PAY POLICY

Memorandum by the Chancellor of the Exchequer and the Secretary of State for Employment

1. When Cabinet discussed on 22 December the outlook for pay negotiations in the remainder of the current round we were invited to put forward a paper on possible approaches to longer-term policy, including institutional possibilities (CM(77) 41st Conclusions).

2. The policies in each of the past three years were presented as temporary expedients to meet the particular circumstances of the time. Their success in meeting their limited objectives - assuming the present round holds as well as it has done so far - along with our other economic measures enables us now to reconsider our longer-term aims with regard to pay, where we want to get to over the next few years and how we might get there, although in the event we may have to settle for an agreement for one year on which we could build later.

3. In this paper we examine the options, starting from the practical position we expect to be in at the end of the current round in July of this year.

THE CONTEXT FOR THE DEVELOPMENT OF LONGER-TERM POLICY

4. As we approach the end of the current round the economic position is likely to be radically different from that of a year earlier. With sterling secure, commodity prices reasonably stable and the benefit of last year's pay restraint feeding through into prices, the year-on-year Retail Price Index should have fallen dramatically, perhaps showing signs of levelling out around 8 per cent. Average earnings will have edged up somewhat over 10 per cent and, depending partly on the extent of self-financing productivity deals, perhaps nearer to 15 per cent. Taking account of the Budgetary measures of last November, those already promised for April and the likely scope for further action then, real standards net of tax will for most people be substantially higher than a year earlier.
5. On the other hand unemployment is likely to be still around 1½ million. Some commentators will be predicting, particularly if earnings are at the higher end of the expected range, a resurgence of price inflation into double figures within the following 12 months. Negotiators, unless persuaded otherwise, might seek not only to insure against this but also to secure in their settlements, ignoring tax benefits, a due share of the real improvement that the more buoyant state of the economy would appear to justify. Many employees, moreover, may be less conscious of their real gains in absolute terms than of their relative losses through compression of differentials, outstanding anomalies and relativity claims, frustrated plans for restructuring etc about which nothing could be done for two years under the £6 and 5 per cent policies and less than we originally hoped in the present round. Many might well be unwilling to wait until normal annual settlement dates to rectify these.

THE BASIC OBJECTIVES: INCREASED EMPLOYMENT AND HIGHER REAL LIVING STANDARDS, REQUIRING MODERATE PAY SETTLEMENTS

6. In this situation the Government must clearly emphasise as the objective over the next two or three years and beyond a significant increase in the level of employment as well as improvement in the real living standards of those in work, of pensioners and of the community generally.

7. A sluggish recovery in world activity and underlying structural changes in the industrial economies would make more ambitious manpower policies necessary and may also make it necessary to continue short-term employment measures longer than we believed. But on whatever hypothesis we have the necessity of improving our relatively low levels of productivity in many areas and this in turn has much to do with improving investment as with improving working practices and management. But that takes time. Meanwhile it will only make our competitive position worse if money increases in pay substantially exceed the increase in production actually achieved; and the effect of this on confidence will tend to discourage investment, so compounding the problem.

8. Since the increase in productivity is unlikely to be sustained at more than 2 or 3 per cent per annum over the next few years, this points to a desirable level of settlements of around 5 per cent.

THE FIRST OPTION FOR PAY: FREE COLLECTIVE BARGAINING

09. We have presented our policies since July 1975 as temporary interruptions in the otherwise natural order of things (though we made clear from the start it would be a matter of years before it could be fully restored). The Trades Union Congress (TUC) last September called by an overwhelming majority for an orderly return to free collective bargaining in the current round, as each group came to its due date under the 12 month rule.

10. There is a theoretical argument that only free collective bargaining can determine the just level for pay in a market economy. Perhaps more cogently, many of those with practical experience of pay negotiations - whether trade unionists, employers or independent third parties - argue that only free collective bargaining can sort out the enormous variety of practical problems of adjustment of pay structures that inevitably arise from time to time, quite apart from the effects of the rough justice of an inflexible pay policy.

11. Yet to leave pay determination to the vagaries of the market place with no guidance whatever carries great risks in our economy. It is difficult to see how one can - for any length of time - have the advantages of free collective bargaining if one is not prepared to accept the market consequences in terms of inflation and unemployment, when bad bargains are struck. There will always be a risk of a high going rate of settlement getting established by bad bargains, because of leapfrogging and ratchet effects. For 1978-79 this risk could be high, given the level of expectations described in paragraph 5 above. Moreover there is a growing recognition inside the trade union movement itself that unless some framework is established which determines the scope for collective bargaining it will be difficult to meet the needs of social justice or the nation's economy.

SPECIAL PROBLEMS OF THE PUBLIC SECTOR

12. Free collective bargaining raises particular problems in the public sector. Traditionally these problems have been met by some form of comparison with the levels of pay, or amounts of increase, negotiated in the private sector (eg Pay Research Unit, the Wilberforce settlement for miners and more recently the forward commitment for firemen).

13. There are, however, a number of difficulties in operating such a system within a general policy of totally free collective bargaining. First, any system based on "catch-up" has an element of delay. Thus when the level of pay increase in the private sector is escalating, the public sector are apparently condemned to trailing behind; when it is de-escalating, increases in the public services will still be reflecting the earlier, higher increases in the private sector, which may then attempt to recover the "lost" ground. In 1978-79, in particular, such an approach could mean settlements for groups settling early in the round, such as local authority manuals, of up to 15 per cent at a time when as indicated above the Government would be looking to the private sector for settlements well within single figures. Secondly, no index linking or other system of comparisons can entirely replace bargaining in the public services to meet changes over time in the nature of the work or a local situation. The private sector comparisons will therefore tend to set a floor with additional increases for some groups on top. Thirdly, public sector pay tends to be fixed by reference to average pay levels elsewhere. Because public service pay levels are nationwide, and because they attract widespread publicity, they appear to be setting the pace for all private sector groups paid below average. Yet if these groups move up, those paid above the average are likely to seek corresponding increases to maintain their differentials. All three of these factors tend to create a situation in which, even under a system of factual comparisons, public sector pay is often seen to be setting the pace and fuelling inflation.

14. The ideas recently put forward by Mr Basnett, General Secretary, General and Municipal Workers Union, presented as they are in the context of free collective bargaining, are open to these objections. But his initiative is an interesting one. It could be well worth pursuing on the basis of some view as to the general level of settlements that should prevail in each current round. But to avoid unfair discrimination against the public services there would also have to be an indication which applied to negotiations in the private sector. This forms the basis of the second main option.

THE SECOND OPTION FOR PAY: AN INDICATIVE POLICY

15. The essential characteristic of an indicative policy is some central guidance as to the generally desirable level of pay settlements and the interval between them; indications might also be given of any general grounds for higher increases (eg productivity or low pay); some arrangements would be needed for identifying groups with wholly exceptional claims. It is in effect free collective bargaining within voluntarily accepted constraints consistent with enlightened self-interest.

16. The West German system of "concerted action" is, of course, essentially of this kind. Its effectiveness is enormously dependent on the economic circumstances in which it is introduced and operated, as illustrated by experience in the United Kingdom with somewhat similar arrangements. It is now advocated by the Confederation of British Industry (CBI). But it clearly could not work without the positive support of the TUC (and at least the acquiescence of all the major unions). If this could be achieved - and we think it is possible in the longer term if not immediately - this would in our view probably be the most attractive of all the options open to us.

17. It might help to get such a policy established if the timing of some of the major negotiations could be synchronised near to the beginning of the round, so enabling an acceptable "going rate" to be established early on and minimise the risk of leapfrogging. We understand that something of this kind operates through two major settlements in West Germany. The essential point, however, is that negotiations should be synchronised; merely to bring settlement dates closer together in breach of the 12 month rule might be costly and insufficient. This could be an idea worth exploring with the TUC generally, and perhaps particularly with public sector representatives. INSTITUTIONAL POSSIBILITIES

18. Such a policy would probably require the evolution of various institutional changes. The indicative statement might conceivably take the form of a joint Government/TUC initiative accepted by the CBI (as in 1974-75 but in more favourable circumstances). Or it might be a Government policy endorsed by the TUC and the CBI. Or it might emerge from some tripartite body, possibly the National Economic Development Council but more likely an ad hoc grouping initially from which some new institution might develop.

19. There is bound to be considerable difficulty in dealing with exceptional cases. There is a problem of finding or establishing an institution whose judgments as to the exceptional nature of such claims would command sufficient acceptance to persuade others to remain content with the lower general level of increase. It might help if the function were split between purely fact-finding (by a body on the lines of the Civil Service Pay Research Unit or the Office of Manpower Economics which services the existing Review Bodies) and adjudication (which might be undertaken by a tripartite or even wholly TUC body). There is also a problem of case load but there might be scope for some of the minor cases to be dealt with, along more defined lines, by the Central Arbitration Committee of the Advisory Conciliation and Arbitration Service which already has somewhat similar functions under Schedule 11 of the Employment Protection Act and its general arbitration role. The chances of such arrangements proving effective are again dependent on the extent to which the TUC would co-operate.

20. The question inevitably arises, however, as to what to do if we cannot immediately get a sufficient degree of TUC support to make a purely indicative policy a viable option, or if, having embarked upon such a policy, it is openly flouted by some significant group or section of the community, for example when salaries are individually negotiated or in small firms. For this reason we also need to consider, as a third option, how such a policy might be sustained - at least to begin with - by other means.

THE THIRD OPTION FOR PAY: A POLICY BACKED BY DISCRETIONARY POWERS

21. This has much in common with the second option, but requires means to enforce the policy. It is hard to envisage the successful continuation of such a policy beyond the current round without at least the tacit acquiescence of the TUC (sufficient to effectively deny support to any individual union taking industrial action against the policy), though such acquiescence might have to emerge as the policy progressed rather than be stated in advance.
22. Apart from this obvious difficulty a problem with this option is that the present kind of discretionary powers can only be applied where the policy requirements are reasonably clear-cut. This makes it difficult to provide adequate flexibility with the general terms of the policy, and would put considerably greater pressure on the mechanism for dealing with exceptional cases. This option cannot be regarded as a stable long-term arrangement but might provide a means of transition to option 2.

THE NEXT STEPS

23. The conclusion of this analysis is that we should seek an indicative policy - the second option. But the prospects depend heavily on the extent and form of TUC co-operation. The best chance of securing such co-operation is to include this subject in discussions with the TUC about the whole range of our economic and social policies. The next steps must be to explore these matters with the TUC. The CBI can be brought in later. The agenda for this part of the discussions with the TUC might progress along the following lines:

a. Assessment of forward economic position, and examination of TUC ideas as set out in their forthcoming "Economic Review".

b. Assessment of implications of a free-for-all.

c. Issues such as the 12 month rule, which might not prove too difficult to negotiate.

d. Approaches to the public sector problem and to the problems of low pay and differentials.

e. Can we reach any understanding on the handling of special cases?

f. Can we get a consensus on the general level of settlement and how do we set about it, particularly as regards timing?

24. Time is short since some indication of the way things might go will be needed by the time of the Budget, and in order to start influencing negotiators' expectations before the commencement of the union conference season which immediately follows and runs through to July.

CONCLUSION

25. We invite our colleagues' views on these somewhat tentative ideas. It might perhaps be helpful to order our discussion round the suggested agenda for talks with the TUC and CBI listed in paragraph 23 above.

Treasury Chambers 23 January 1978

D W H A B 24 January 1978

CABINET

SPECIAL EMPLOYMENT MEASURES 1978-79

Memorandum by the Secretary of State for Employment

1. The employment prospect this year is gloomy and the labour force is growing - by 170,000 a year. I hope there will be scope for considerable reflation this year, but this takes time to produce jobs and would not make any dramatic impact on unemployment this year. I have therefore proposed an expansion of our special employment measures which would keep another 110,000 people off the unemployment register - raising the total impact to around 360,000. This would be achieved by continuing the Temporary Employment Subsidy (TES) and by expanding the Small Firms Employment Subsidy (SFES) and the Job Release Scheme (JRS). These measures would make their full impact over the coming year and are about ten times more cost effective in reducing unemployment than general reflation.

2. I should have liked to propose action wholly to offset the expected 170,000 increase in the labour force this year, but other measures we have looked at to do this are not as cost effective.

3. The Ministerial Group on Unemployment Among Young People (GEN 27) agrees broadly on the need for an increased impact on the register and on the scale of assistance, but has not yet decided whether this should be achieved by the measures I propose or by other means. Measures agreed by the Group to date would take only a further 35,000 off the unemployment register. This is too small, particularly when we may have to take a cut in TES.

4. The difference within GEN 27 boils down to the extent of the expansion proposed in the SFES and the JRS. On SFES, we are agreed that it should be open to firms with up to 200 employees, but a majority of GEN 27 wish to confine it to assisted areas and inner city areas whereas I wish to see it extended nationally, with a higher subsidy of £25 being paid in development areas and inner city partnerships.

5. On JRS, my colleagues agree that it should be extended nationally, but I wish also to open it to workers within two years (instead of one year) of retirement and to raise the tax free allowance from £26.50 to £40, which research has shown would be a cost effective way of increasing the impact. JRS is our only instrument acting on the labour supply and a means of avoiding unfavourable pressures for early retirement.

6. The gross annual cost of the package I propose would be £496 million (assuming no cuts in TES) but the net annual cost and effect in the Public Sector Borrowing Requirement (PSBR) would be only £118 million. There would be net staff savings because of reductions in the unemployment benefit service.

7. Even on this basis, it would be desirable to review the situation during the summer to see whether more could usefully be done, particularly on training for the unemployed.

TES AND THE EUROPEAN ECONOMIC COMMUNITY (EEC)

08. If we want to continue the TES after 31 March 1978, we have to notify the EEC Commission by 31 January 1978 of the form in which we propose to operate the Scheme. The two months' notice is needed for the Commission to consult other Member States and to make up its own mind finally about our proposals.

09. There are 180,000 subsidies in payment under the TES of which 105,000 are in textiles, clothing and footwear. (There are additionally some applications in the pipeline). The Commission have intimated to us formally that they want changes in the Scheme which would reduce the number of textile etc. subsidies in payment by around 85,000. In informal discussion Commission officials have indicated that the Commission might be prepared at the end of the day to settle for a reduction of 50,000 in the number of textile etc. subsidies. We have offered no more than basically procedural changes in the Scheme ie no reduction in numbers.

10. When the matter was discussed by GEN 27 I was asked to make further enquiries in Brussels and elsewhere and I will report orally to the Cabinet on the result of these. However, I do not expect any important change in the situation I have described.

11. Other countries operate employment subsidies of various kinds and in Belgium and the Netherlands there are schemes specifically directed to the textiles/clothing sectors. The Commission claim to judge each scheme on its merits. In response to an enquiry from the Prime Minister there is to the best of our knowledge, no significant scheme of aid in France directed specifically to the textile industry.

12. Clearly it would be easier for us to make a concession on textiles etc if we could replace the TES for the three industries in question by an alternative scheme acceptable to the Commission. We have looked at the possibility in conjunction with the Department of Industry and one possibility has emerged. I might be able to devise a special scheme of support for short time working in these industries. Such a scheme might replace TES wholly or in part in the three industries, though its effect would fall somewhat short of TES in terms of jobs saved. I am making detailed proposals to GEN 27. If they commended themselves they could be introduced from, say, 1 July 1978.

13. I propose to the Cabinet that we should notify the Commission as required by 31 January that we are looking at alternative schemes to replace the TES wholly or partly in the textiles, clothing and footwear sectors; that meanwhile we propose to extend the TES to 30 June (subject to some small changes, including prior notification of important applications); and that we will by 30 April present fresh proposals to them designed to meet their concern by reducing the dependence of textiles, clothing and footwear on the TES.

TIMING OF ANNOUNCEMENT

14. There is much to be said for making a general statement of our intentions at the end of January before we notify our proposals for TES to the EEC. (We have also to notify our intention of extending the SFES). This would remove uncertainty about the future of the schemes, would precede any leaks from Brussels and could be useful when the National Economic Development Council discuss the employment implications of the industrial strategy on 1 February. I attach a draft of such a statement. This would be followed with an announcement in mid-March of the detailed basis on which these schemes would proceed.

RECOMMENDATIONS

15. I recommend that:-

a. We should aim to build up the impact of the measures towards 360,000 in 1978-79 by extending JRS and SFES to the whole country, with JRS open to those within two years of pension age and with a tax-free allowance of £40 and SFES open to manufacturing firms with up to 200 employees.

b. We should notify our intentions regarding TES to the EEC as proposed in paragraph 13. c. We should make the attached statement of our intentions before the end of the month, followed by a more detailed statement around mid-March.

A B

Department of Employment

23 January 1978 DRAFT STATEMENT

We have already announced that the new Youth Opportunities Programme to help 16-18 year olds and the Special Temporary Employment Programme for adults will be operating throughout 1978-79 and that there will be a final round of special training measures for this year before the Manpower Services Commission's new training in skills programme comes into operation.

The other special employment measures - the Temporary Employment Subsidy, the Small Firms Employment Subsidy and the Job Release Scheme - reach their closing date for applications on 31 March 1978. We have decided that these schemes will be extended in a broadly similar form for a further year from 1 April 1978 until 31 March 1979. We intend to continue the Temporary Employment Subsidy and to enlarge the coverage and impact of the Small Firms Employment Subsidy and Job Release Scheme. We shall be discussing our proposals for the Temporary Employment Subsidy and the Small Firms Employment Subsidy with the EEC Commission and I will make a further statement on the detailed basis on which these schemes will operate in 1978-79 in due course.

The special measures are currently assisting some 330,000 workers and are estimated to be reducing the unemployment register by 250,000. The extensions of the measures I am announcing today along with the development of the other schemes already announced will increase very substantially over the coming year the impact on unemployment. CABINET

BENEFITS OF NORTH SEA OIL

Note by the Secretary of the Cabinet

1. Following the discussion on 15 December (CM(77) 40th Conclusions, Minute 5) I was instructed to prepare a draft White Paper for consideration by the Cabinet.

2. I attach this draft herewith. It also incorporates a number of amendments made by the No. 10 Policy Unit.

Signed JOHN HUNT

Cabinet Office

23 January 1978 INTRODUCTION

01. North Sea oil provides a unique opportunity for Britain to improve her economic performance, raise her living standards, move forward to full employment, and develop a socially just free and fair society.

02. For too long Britain had a weak balance of payments, slow productivity growth and low investment. As a result, our living standards, which were among the highest in Western Europe, are now among the lowest. Governments have tried repeatedly without success to alter these trends. Change will not be easy now, but we shall never have a better chance.

03. The prolonged world recession focussed attention very sharply on our problems. Following the fivefold rise in oil prices, and the heavy additional cost of importing oil, Britain borrowed heavily abroad to finance the balance of payments deficit. In addition we suffered disruptingly rapid inflation. The recession has highlighted the uncompetitiveness of some of our major industries, which have required substantial Government assistance. Plans for increased social expenditure had to be scaled down.

04. Nevertheless in the past year the country's position has substantially improved. We are no longer borrowing abroad: and we are beginning to repay debt. The rate of inflation has been dramatically reduced - thanks largely to the co-operation of the trades union movement in a voluntary incomes policy. Unemployment is still unacceptably high, but the Government has taken action to contain it, and is now in a position where it should be able to take further measures positively to reduce it.

05. The next task is to build on this stability to move back to growth in production and employment.

06. Here it is that North Sea oil gives us a great opportunity. Sensibly used in line with the policies laid out in this White Paper, it can enable us to rebuild the industrial strength of the nation, to the benefit not only of this generation, but of our children and our grandchildren.

07. But it also presents us with a challenge. North Sea oil is not a panacea; and as a nation we have to decide how best to use the benefits it brings. It would be all too easy for Governments to use the extra revenue simply to finance faster growth in living standards through tax reductions and increased social benefits to an extent which would leave insufficient room for increased productive investment. But rapidly expanding living standards, with no direct provision for stimulating investment, would entail balance of payments risks and would be unlikely to be sustainable in the longer-term; we would have done little to develop new sources of energy to replace declining output of North Sea oil; and we could well find, as the oil starts to run out, that nothing had happened to improve our general economic performance. The Government believes that it would be wrong to fritter away the benefits of North Sea oil in this way.

08. North Sea oil is one element in what must be a continuing and long-term programme for national recovery. A Labour Government of the 1980s will place industrial regeneration, and the rapid return to full employment, at the heart of such a programme. Part of the revenues flowing from North Sea oil will be channelled directly into industrial development by way of direct help and through the National Enterprise Board, and the Scottish and Welsh Development Agencies. High priority will be given to investment in new energy sources, and in energy conservation. The Government will introduce a more effective, and more generous, structure of private sector investment incentives, both national and regional.

09. Sustained economic expansion will not be possible if the Government's investment strategy fails. Equally, however, we recognise that no programme designed to stimulate investment can succeed unless the macro-economic background is conducive to industrial expansion. The Government will therefore use part of the benefits of North Sea oil to reduce taxation on the private sector, and to undertake a programme of selective improvements in the public services. Such an integrated programme should allow the economy to expand sufficiently rapidly in the 1980s to ensure a return to full employment.

10. In this White Paper, the Government sets before the British people its view of the likely size and duration of the oil revenues, and its priorities for making use of these revenues. The White Paper presents the Government's plan to use our oil to regenerate and reinvigorate our economy, and to lay the foundations for a Britain at once prosperous and socially just. The Government, through its general economic policies, can set the broad framework for such a strategy; and some of the major investment decisions - such as the development of alternative sources of energy - must, in the end, be the Government's. But what the Government can do by itself is strictly limited. If the strategy is to succeed, it will require the co-operation and effort of management, workers, and the British people as a whole. We seek the support of the whole nation in that task.

NORTH SEA OIL: A NEW DIMENSION?

11. In 1977, North Sea oil production was already equal to about half the United Kingdom's total consumption; and the balance of payments gained by some £2 billion. Without it, the turn-round of 1977 would have been more difficult, and would have taken longer.

12. We are thus already enjoying the first benefits of North Sea oil. By 1980, we expect to be producing as much as we can consume; and we can expect to be a net exporter of oil at least for some part of the 1980s. By the late 1980s production on present forecasts may begin to decline, and while production should continue at a substantial level for at least another 10 years, we may well become net oil importers again in the 1990s.

13. The benefits which North Sea oil will bring to the economy can be looked at in three ways. If the real price of oil remains unchanged, it can be expected:

a. to increase Gross National Product (GNP) by around £3½ billion in 1980, and by £5 billion in 1985 (at 1976 prices): this is a temporary boost to national resources equivalent to between 3 and 5 per cent of present GNP;

b. to provide a substantial new source of Government revenue: receipts will be small in 1978; but they will reach £1½ billion in 1979, and by the mid-1980s they should rise to at least £3½ billion (at 1976 prices): this is equivalent to about 7 per cent of present total Government revenue;

c. to improve the balance of payments by about £5 billion in 1980, rising to £7-8 billion in 1985: this is equivalent to about 7½ per cent of present visible and invisible imports. 14. Thus, North Sea oil can be expected to provide a relatively small addition to total national resources, a sizeable addition to Government revenue, and a major improvement in the balance of payments over the next decade. Thereafter, the benefits are likely to decline. Not only are the benefits of North Sea oil likely to be temporary. Their direct effects are largely to save foreign exchange and to increase Government revenue. Of themselves, they will do nothing to improve our economic and industrial performance.

GENERAL POLICIES

15. The Government's general policies will be designed to create the conditions in which its plans for the sensible use of North Sea revenues can best be achieved.

16. First, the Government needs to promote the expansion of economic demand and activity, and get the economy moving forward to full employment. This will be much easier to do if other major industrial countries take similar expansionary action; and the Government will continue - as it did in 1977 - to urge on other major countries the need for effective action to bring the world economy out of the present recession. But, even if the world economy does not recover rapidly, the United Kingdom can take advantage of its improving economic position to start expanding the economy through appropriate fiscal and monetary policies.

17. Second, it is important that, in the process of expansion, we maintain and improve the international competitiveness of our industries. Otherwise we shall lose export markets and suffer increasing import penetration. An absolute requirement for such an improvement in our competitiveness is to win the battle against inflation. Substantial progress has been made in this endeavour over the past 2 years, but the battle against price increases must be fought to victory. The gains from controlling inflation, and the threat which renewed inflation would pose for the rest of our objectives, are both so great that this must be an essential part of the Government's strategy.

18. Thirdly, industrial efficiency goes beyond price competitiveness. Therefore the Government intends - as it indicated in the White Paper on Industrial Strategy - to give industry first priority in the whole range of its policies. The wider implications of the industrial strategy for other policies are being examined, and the need for changes in direction or emphasis are being identified. Many of these will need time to take effect, but the Government proposes to implement them progressively and to persist with them.

19. We will need more and better investment (see below paragraphs 21 to 25), but investment, by itself, will not be enough: industrial relations in its widest sense will need to improve. The potential benefits of new machinery and more efficient techniques can only too easily be squandered if the whole-hearted co-operation of those involved is lacking. Continuity of production, realistic manning levels, prompt delivery and quality control - these are crucial in winning markets and improving production; unless we strengthen our manufacturing performance in these areas, no amount of investment will succeed. A new approach to industrial relations is therefore required; one which replaces attitudes of confrontation with democratic participation. In contemporary society, workers need to understand the problems which face the firm they work for and how they can share in decisions to improve its performance; for it is the progressive and competitive firm which offers its employees the best prospect of job security and rising real wages in the longer-term. For this reason, the Government will continue with its efforts to promote industrial democracy in both the private and public sectors.

THE USE OF NORTH SEA REVENUES TO ASSIST NATIONAL RECOVERY

20. Within the framework of general policy objectives set out above, the Government proposes to utilise the revenues from the North Sea in giving specific emphasis to a selection of policy areas which it believes are crucial to the recovery of the United Kingdom economy. Particular emphasis will be given to:

i. investment in industry;

ii. promotion of energy supply and conservation;

iii. reducing the burden of taxation;

iv. increasing public investment on social and economic infrastructure. After full consideration, the Government has decided that it is not in the national interest to use North Sea revenues on a programme of major debt repayment - designed, for example, to clear debt by any arbitrary date such as 1990. This would almost certainly entail running the economy at a level of demand which would be incompatible with either a return to full employment, or a major restructuring of British industry. The Government therefore intends to roll forward a portion of the United Kingdom's international indebtedness for eventual repayment in the 1990s or beyond.

It is now proposed to look at the four specific uses of North Sea revenues in more detail.

INVESTMENT IN INDUSTRY

21. Substantial increases in investment will be essential if the strategy is to succeed. Modernisation and much higher levels of productivity are needed in many firms and industries if they are to retain and improve their competitiveness. Some firms will be able to take on more labour; others will be producing more, but with a smaller work force. To raise productivity, and to create new jobs to absorb both the increase in the labour force and the workers moving out of declining sectors will require a quite different scale of industrial investment and expansion of industrial output than we have seen in the past 10 years.

22. Most investment decisions have to be taken by industry itself. At present, one reason why investment is low is because demand is low. Industry is uncertain whether new investment would earn an adequate return. If industry is to flourish it needs a stable environment. It also needs confidence in a steadily growing market for its products both at home and abroad. And it needs the prospect of a satisfactory return on its investment. The general economic climate is crucial. To some extent, this depends on international factors outside our control, but whatever other countries do, a general stimulus of the United Kingdom economy is a precondition for recovery. North Sea oil will ease the balance of payments constraints on expansion. We must use this greater freedom to pursue demand management policies which offer the prospect of steadier growth of demand, at higher levels than would otherwise have been possible. In the first stage of the recovery, such a stimulus will contribute directly to creating a stable and favourable climate for industrial expansion. As the recovery proceeds, the Government will need to ensure that resources which, on a longer-term view, should be devoted to industrial investment and infrastructure, are not pre-empted by unsustainable increases in consumption - private or public.

23. The experience of the past shows, however, that expanding demand alone is not enough to bring about a sufficient increase in investment. So in addition to helping to create this climate of confidence, the Government will need to be involved more directly. The North Sea revenues will enable it to provide an effective framework of general investment incentives, both national and regional. But over and above this there is the need for selective assistance and intervention which, properly used, will be more cost-effective than general assistance.

24. The tripartite industrial strategy points the way forward by steadily building up, sector by sector, a detailed picture of the opportunities ahead and the action needed to seize them. There are many areas where United Kingdom industry has strengths on which we can build. There are new products and processes to be developed and exploited. Industrial activities directly related to North Sea oil present one example with obvious attractions. The Government will do everything possible to further the industrial strategy through the Sector Working Parties and to encourage the firms and unions concerned to see that the conclusions of the Working Parties are translated into positive action in the board room and on the shop floor. Planning Agreements, like the industrial strategy at sectoral level, will provide a means of concerting action by Government and individual firms.

25. As an integral part of this strategy, the Government itself intends to invest in Britain's manufacturing future through the National Enterprise Board, both directly and in partnership with the private sector, and through the Scottish and Welsh Development Agencies. They will have an important part to play in expanding investment: particularly in projects which aim to modernise and expand industry in declining areas, to provide alternative job opportunities, and to improve the industrial infrastructure. In all this, the regional dimension will be taken fully into account. It will be a major aim of the Government to ensure that Scotland, Wales and the regions of England benefit fully from the proposals for modernisation and expansion which the industrial strategy is developing.

ENERGY

26. Two further areas where the Government intends to use the oil revenues to enable more to be done than would otherwise have been the case concerns the production and conservation of energy itself.

27. The first is investment in new energy sources to meet the needs of our economy in the medium-term and then to assure our supplies when North Sea oil and gas begin to run out. On current forecasts, United Kingdom primary energy demand is expected to rise from a total of 200m tonnes of oil equivalent in 1975 to perhaps 240m tonnes in 1985, to some 330m tonnes by the end of the century, and to go on rising thereafter. During this period, North Sea oil production is likely to rise to a peak of 100-150m tonnes in the middle 1980s, and then to decline to rather less than 100m tonnes by the end of the century and progressively to decline thereafter. Very substantial investments in conventional energy sources - coal, gas, oil and nuclear power - will be needed if our supply objectives are to be met.

28. In addition to these investments in conventional energy, the next two decades will require a growing expenditure both on new and unconventional sources of fuel supply and possibly on the conversion of primary fuels (eg coal) into more usable forms of energy (eg gas). At present, work on renewable forms of energy - solar, wind, wave, tidal and geothermal power - is in the early feasibility stage and expenditure of funds is comparatively small. The Government will give greater priority to these developments. In due course a high level of expenditure will be needed in these areas so that the economy can continue to grow in the post-oil era. The Government has already published [will shortly be publishing] a Green Paper on Energy Policy which outlines [will outline] important possibilities in the field of energy research and development.

29. Directly linked with this is the need for more energy conservation. Previous conservation policies saved us approximately £2,000m over the last four years; and now policies announced at the end of last year aim at an annual saving of 10m tons of oil equivalent worth some £700m. Reserves of sources such as oil, natural gas and coal are finite, and world demand is increasing. By the end of the century energy could cost two or three times what it costs today. Further developments of energy conservation measures will therefore be an integral part of energy policy, both to reduce costs and to provide more time to develop and introduce the technologies that must ultimately replace existing fuels. A further advantage of investment in energy conservation is that it has short lead times, tends to be labour-intensive, and in some instances offers very high returns. The Government's aim will be to achieve the maximum savings in energy use which can be economically justified.

30. Investment of the oil revenues in replacement energy and conservation is a way of spreading the benefits of North Sea oil forward so that future generations may enjoy the security of energy supplies which we have today: and it may be one of the most productive ways in which they can be invested. It is likely to enjoy a high rate of return in its own right. And by reducing and postponing the need to import energy, it will both improve the balance of payments and increase the security of our energy supplies.

TAX REDUCTIONS

31. A programme of major tax reductions, with no direct provision for any expansion in the economy's productive base, would be likely to increase national living standards only temporarily. We have seen many times in the past that a general reflation of domestic demand rapidly results in increased imports and a balance of payments deficit. In the 1980s, with North Sea oil helping the balance of payments by up to £2bn a year, it is possible that we might be able to sustain a consumer-led boom for longer than we have managed in the past. However, we would, in effect, be using our North Sea oil resources to finance a temporary increase in consumption - an increase which would have to be reversed as soon as the oil revenues start to run out, and which would benefit foreign, rather than domestic, suppliers.

32. The Government unequivocally rejects this course. However, there will be scope for tax reductions in the years ahead. We have explained that increases in investment, and in living standards, must come together. Each makes possible the other. Provided that the investment strategy works, the Government therefore sees scope for continuing to reduce the burden of personal taxation. This will not only result in higher economic growth, making possible a return to full employment. It will also ensure that the real take-home pay of working people can be increased without inflationary rises in money wages.

PUBLIC INVESTMENT AND PUBLIC SERVICES

33. The above measures for greater industrial investment, for more energy production and conservation, and for further tax cuts, will substantially benefit private industry and personal consumption. There are those who argue that only the private sector and personal consumption should benefit from the North Sea. The Government rejects that view. In a complex modern industrial society, both public and private spending have a part to play, each supplementing the contribution of the other in our mixed economy. It is for Government to strike a proper balance between the two, allowing for a growth in public investment and services commensurate with what the economy can afford.

34. The Government intends to retain a firm control over public expenditure so that it remains within the limits set out in the annual Public Expenditure White Papers and does not absorb too high a proportion of the nation's resources. However, certain areas of the public sector can be identified where it would be in the national interest to devote some of the North Sea revenues.

35. The investment plans of the nationalised industries will need to match the expansion of the economy: expenditure on essential communications, docks, harbours, etc, must keep pace.

36. The problem of our inner cities is also urgent. The Government has already given priority to its plans for reinvigorating the inner areas of certain specified conurbations. North Sea revenue will enable this programme to be pursued with continuing vigour in the years ahead. In these areas what still remains of the social fabric of Victorian England - the run-down houses in which many of our immigrant communities live, the hospitals and schools which all sections of the community use - is collapsing and must be renewed.

37. We shall also need more ambitious training and retraining programmes, both in schools and in further education, to develop industrial and commercial skills in our working population. Our manpower is our most valuable enduring national resource and during much of the period when the oil revenues are flowing, the supply of young people to employment will be falling. Two things follow. The preparation of young people for the world of work must be the best we can give them, developing fully their potential talents. Secondly, there will be the need and the opportunity to make it possible for more men and women to continue their education and training throughout their working life. In all this the emphasis must be on quality and relevance since North Sea oil creates both the need and the resources in our people and in the skills to safeguard our future.

38. Finally, as Britain grows more wealthy, it is crucial that our society does not forget its disadvantaged - the old, the sick, mentally as well as physically, one-parent families - these must not be neglected. It is a fundamental part of the philosophy of the Labour movement that the underprivileged and disadvantaged have an equal claim on the resources of our society. The good fortune of our natural energy inheritance must be shared among all our citizens. MONITORING PROGRESS

39. This is an ambitious programme but it is fully capable of achievement. It will, however, take years of determined effort as the Government revenue from North Sea oil builds up from £1.5bn in 1979 to at least £3.5bn in the mid-1980s and is channelled towards transforming our economic and industrial performance, securing our energy position in the longer-term and improving our economic and social infrastructure. Precisely because it is a long-term programme that has to be set in a wider context, it will need to be implemented flexibly. This makes it the more necessary to set objectives and regularly to monitor progress towards them. Only in this way can we contain the risk of dissipating the advantages which North Sea oil can give us.

40. The Government have considered whether this need to monitor and account for the use being made of the North Sea revenues can best be done by means of a special North Sea Oil Fund.

Alternative Paragraphs

41A. It is true that the establishment of such a Fund would involve a measure of artificiality. It would be difficult precisely to define the dividing line between those activities which were additional as a result of North Sea oil, and those which would have been financed in any case through the medium of the Government's ordinary public expenditure programme.

42A. However, the Government believe that other considerations outweigh this. From a psychological point of view, a Fund would help to concentrate the public mind on the once-and-for-all nature of our North Sea wealth, and the need to use it in the interests of the whole nation. In particular, we need to ensure that to the maximum extent possible the use of the oil revenues will be visible and accountable. We have therefore decided to set up an Oil Fund which will focus public attention on this new source of revenue and which will help to ensure that the revenues are not dissipated unwisely. The Government believe that both Parliament and the public will welcome the opportunity which the Fund will provide for continuing informed discussion about the distribution of a precious national asset. 418. The main argument put forward for a Fund is that it would avoid the revenues being dissipated unwisely and would provide the medium for continued informed discussion about the distribution of a previous national asset. A Fund in the technical sense would, however, only be practicable if the oil revenues were being devoted to a few major projects or activities which would not otherwise have been undertaken and which were financed solely or mainly in this way. The Government's intention is, however, to use the benefits of North Sea oil as one element in a much wider strategy for national recovery. This means that there would be no way of showing with any conviction what expenditure on, eg industrial investment, energy resources or infrastructure, was part of the Government's ordinary programme and which was additional as a result of North Sea oil.

423. The Government do not therefore propose to establish an Oil Fund as such. But it is essential that progress towards the objectives set out in this White Paper should be properly and publicly monitored. The Government intend to make an annual report to Parliament on the progress made towards its objectives for the use of the North Sea revenues. This would also allow account to be taken of the wider benefits which the North Sea will provide in the running of the economy which could not in any case form part of an Oil Fund.

CONCLUSION

43. For the next decades we shall have the considerable revenues of North Sea oil and fewer balance of payments problems than we have had since the war. This must not be seen as a temporary breathing space in which to enjoy a standard of living we have not earned, but as an opportunity to secure lasting national economic recovery. This means setting clear priorities for the use of North Sea benefits.

44. The Government are confident that the strategy described in this White Paper is the right one. The Government will set the framework and play its own part: we are committed to increasing economic activity and employment. Better living standards should follow from that and from the tax reductions which can be genuinely afforded. Investment in both the private and public sectors is an essential part of the strategy. But investment, whether in manufacturing industry, in the energy industry or in essential social infrastructure - is not enough. There is a need to encourage and harness the energies and talents of the British people if we are to secure both greater productivity and the development of a socially just free and fair society. It is in that spirit that we should use the opportunity presented by North Sea oil.

24 January 1978 CABINET

COMMON FISHERIES POLICY

Note by the Minister of Agriculture, Fisheries and Food and the Secretary of State for Scotland

1. The attached note by the Minister of Agriculture, Fisheries and Food and the Secretary of State for Scotland will be considered by the Ministerial Committee on European Questions on Wednesday 25 January. It is circulated to members of the Cabinet as background for discussion of this subject under Item 3 of their agenda for Thursday 26 January. Members of the Cabinet may find it useful to have in mind the main objectives in COM(78) 2 to which the present note refers.

2. These are

a. **Quotas** - an allocation of fish that reflects our distant water losses and our contribution to resources.

b. **Conservation** - satisfactory Community conservation measures and a right in certain circumstances to take our own national measures.

c. **Coastal belts** - exclusive access to fishing grounds within 12 miles of our coast subject to the phasing out of existing historic rights.

- preferential access for United Kingdom vessels to fishing grounds between 12 and 50 miles.

J S BM

Ministry of Agriculture, Fisheries and Food

24 January 1978 COMMON FISHERIES POLICY NEGOTIATIONS

Note by the Minister of Agriculture, Fisheries and Food and Secretary of State for Scotland

1. COM(78)2 was discussed by the Committee on 12 January and described the position following the Fisheries Council in December and the prospects for the Council of 16 January. This note brings the position up to date and seeks guidance for further meetings of the Council which will begin on 27 January.

2. The most important general point about the last Council was that, despite difficulties, it did not break down. The Belgian Presidency made a somewhat alarmist public statement but there was in fact no atmosphere of crisis. On the other hand there was little clear progress but the Council meeting was probably a stage which had to be gone through on the way towards an ultimate settlement. The pressure upon us to settle quickly remains very heavy and will undoubtedly be renewed at the next meeting, which is being put about as the meeting at which final decisions will have to be taken.

3. Quotas - turning to the main individual issues Commission proposals on quotas are (as we told the Committee on 12 January) a genuine advance on any previous quota proposals and indeed go further in our direction than we would have expected even if they still fall somewhat short of our objective. They were not discussed at length during the Council but were received with so little comment that it appears likely that they could be agreed. Denmark is the main sufferer from the Commission's efforts to meet our position but there is nevertheless some indication that the Danish Minister might accept the proposals despite strong opposition from his own industry. The Presidency pressed us to agree to the quota proposals but we have always refused to allow individual issues to be settled until we can see the CFP package as a whole and we did so again on this occasion. Nevertheless we must recognise that it may become very difficult to make a major issue out of securing further improvements on quotas - which would inevitably be modest - if everyone else accepted them and we were able to secure our main objective on other parts of the package. We would therefore recommend our colleagues to allow us authority to accept the Commission quota proposals, subject to such minor improvements as we can get, if at the same time we could secure a satisfactory settlement on the other issues. The figures have already been rejected by the industry and there would therefore be some presentational advantage in seeking some increases, even in the less important species.

4. Conservation - this was a disappointing Council as regards conservation. At the start of the meeting the Commission produced revised proposals which were weaker than their earlier proposals on 3 important items: the size of the Norway pout box; increasing the minimum mesh size for the main and vitally important white fish species; and the carriage of large and small mesh nets on the same voyage. We know that most other Member States dislike strong conservation measures and that the Commission are lukewarm - as they have again proved in their revised proposals. For the moment our position is covered by our general reserve on any single aspect until we can see the whole package. We shall continue to press for firm measures. Obviously however we shall have to accept some compromise if agreement is to be achieved. The highly sensitive issue of national rights to take conservation measures was not discussed, but we will clearly be under heavy pressure at the next Council to accept a very much circumscribed procedure which would substantially reduce our present freedom of action.

5. Coastal belts - this was the first Council meeting at which the issue of coastal belts began to be seriously discussed. On the 12 mile belt our aim of exclusive control after allowing time for existing historic rights to be brought to an end is not only of real economic importance but in the eyes of the industry is a touchstone of the Government's determination and success. At present, the Commission proposals merely provide for the rights of other members inside 12 miles to be defined and limited. We argued that they must be terminable.

6. On the 12 to 50 mile belt the Commission have so far made no proposals but Commissioner Gundelach did undertake to state how the concept of fishing plans (that is arrangements for limiting fishing effort in defined areas) "might be a vehicle for overcoming the political difficulties with which we are concerned". Most Member States, and up till now the Commission themselves, remain firmly opposed to our objective of preferential access between 12 and 50 miles although Ireland is of course on our side and we may be able to get sympathetic neutrality from Italy provided we give her a measure of support over her worries about fishing off West Africa. In any case while we can be reasonably flexible about how we achieve access preference it is a vital objective and is the best means of achieving some permanence and reality in the quota preference we now seem likely to obtain. We have therefore arranged informal consultations with the Commission and will be able to report on these at the meeting of the Committee. We understand however that the Commission are reluctant to take the initiative in tabling proposals at this stage without a firm mandate to do so.

CONCLUSION

7. The CFP negotiation continues to be of the utmost difficulty. The pressure to settle during the week beginning 30 January is likely to be very heavy and we should not rule out the possibility or the need to make an agreement then. To some extent the evident anxiety of the others and especially of Germany to get this issue out of the way may act to our advantage. We therefore invite the Committee to agree the following:

(i) our reserve on all parts of the package should be maintained until the whole of it is clear. The following points are subject to that.

(ii) We may have discretion to accept the Commission's quota proposals, subject to some possible improvement.

(iii) We should continue to strive for a better conservation proposal than is now being made but should exercise judgement on how far to press this if other items are satisfactory. (iv) We should continue to aim at retaining the national right to introduce conservation measures but should again have discretion to accept limitations upon it in the light of the rest of the prospective package.

(v) We should insist on ultimate exclusive access within 12 miles and on an access preference between 12 and 50 miles reflecting a preferential quota position. While we should aim to avoid any final breakdowns of negotiations we should not allow ourselves to be hurried into a settlement and we should not make agreement at the next Council unless these points on access can be achieved.

Ministry of Agriculture, Fisheries and Food 23 January 1978 CABINET

SPECIAL EMPLOYMENT MEASURES

Memorandum by the Secretary of State for Education and Science and Paymaster General

1. There are now over 1.5 million registered unemployed. But for the impact of special employment and training measures this figure could be up to 4 million higher. Over the next year labour supply is likely to increase by 170,000.

2. Against this background the Ministerial Group on Unemployment Among Young People (GEN 27) has been considering the need for continuing special employment measures when the existing Temporary Employment Subsidy (TES), the Job Release Scheme (JRS) and the Small Firms Employment Subsidy Scheme (SFES) run out at the end of April. The Group consider that special employment measures will continue to be needed and that the right course at present is to build on existing measures though we are proposing to consider in addition any suggestions that may be forthcoming. Our views and recommendations on continuation of the existing measures are as follows.

TEMPORARY EMPLOYMENT SUBSIDY

3. TES gives employers a subsidy of £20 a week for up to a year for each redundant job they retain, with the possibility of a six month supplement at £10 a week. This is by far the largest of the special measures (at mid-December 1977 it covered 186,000 jobs with a register effect of 133,000). It is also the cheapest, with negligible net costs. We agreed that it, and the six month supplement, should continue for another year, subject to any modifications to take account of European Economic Community (EEC) objections (see paragraph 7 below).

SMALL FIRM EMPLOYMENT SUBSIDY

4. The SFES currently provides a subsidy of £20 a week for each extra job provided in manufacturing establishments of less than 50 employees within Special Development Areas (SDAs). About 8,250 jobs should be supported by March 1978. About one third of the jobs would not otherwise have been created. We agreed that the scheme should be extended to manufacturing firms of up to 200 in Development Areas (DAs) as well as SDAs and also in Inner City Partnership Areas. This would create a maximum effect on the unemployment register in 1979 of 4,750 at a gross annual cost of £21 million. Mr Booth would like the subsidy to be available country-wide which would push up the register effect to 23,000 and the gross cost to £105 million; he would also like to pay a higher rate in the Development Areas and Inner City Areas. The Group thought that Mr Booth's recommendations should be accepted only if there were a significant reduction in the impact of TES resulting from EEC Commission restrictions.

JOB RELEASE SCHEME

5. JRS provides a tax free allowance of £26.50 for up to a year for employees within one year of the state pension age who leave their jobs and the employer agrees to recruit a replacement from the unemployment register. It is limited to Assisted Areas and currently reduces the unemployment register by about 8,000 at an annual gross cost of £11.5 million. The Group agreed that the scheme should apply country-wide and that the allowance should be up-rated to about £28-£30, broadly in line with parallel social security benefits. This should have a maximum effect on the register in 1979 of upwards of £17,500 at an annual gross cost of £25 million plus. Mr Booth would like to increase the period of eligibility to two years and the allowance to £40, tax free. This would increase the impact on the register to 78,000 and the annual gross cost to £170.0 million. The majority of the Group thought £40 too high and noted also that legislation would be necessary to keep it tax free if paid for a second year. They thought it would inevitably increase the pressure for other benefits to be untaxed and that many of the beneficiaries might also have occupational pensions. They also thought that it could build up pressure for a lowering of the retirement age generally and would be resented by low-paid workers and by others on social pension and benefits.

OVERALL EFFECT AND COST OF MEASURES (See also Annex)

6. Mr Booth's proposals would increase the employment effects by about 100,000, giving an overall effect on the register of all measures of 360,000 by March 1979. This does not include any offset in TES to meet the EEC Commission. GEN 27's recommendations would give a figure in excess of 283,000 by the same date, an increase of over 23,000 on present levels. Subject to any offsetting savings Mr Booth can find, the gross costs would be a charge on the Contingency Reserve, amounting, under his proposals to £277 million in 1978-79, and under GEN 27 proposals to upwards of £144 million (the £277 million does not allow for the cost of giving more under SFES to firms in DAs and Inner City Partnership Areas and the £144 million does not allow for any increase cost if the JRS allowance is increased to £28-£30). If the present schemes were continued unaltered the comparable cost would be £127 million. On Mr Booth's proposals his Department would require an extra 240 staff in addition to 270 already engaged on these schemes.

EEC COMMISSION

7. Following complaints from some member states, the Commission wish to impose severe restrictions on the continuation of TES in the textiles, clothing and footwear industries, which they regard as distorting competition and exporting unemployment. Without EEC approval by 1 April, payments in respect of applications received after 1 April would be illegal. We ought to put in our detailed proposals by the end of this month as the Commission is entitled to take two months to consider them. Views in GEN 27 were divided on whether to take a tough line with the Commission, yielding no material concessions and accepting that this would probably lead to an adverse decision in the European Court, or whether to attempt to achieve a negotiated settlement. Under the first approach the conditions we might be forced eventually to accept could be stiffer than those we might be able to negotiate but they would be clearly seen as imposed upon us. The majority of the Group thought that a willingness to negotiate, at least, initially was the right course; and that it was only realistic to look seriously at options which would enable us to phase TES down, such as a short time working compensation scheme. There may be some possibility that negotiations with the Commission on TES would be eased if it was clear that it would be replaced by a more acceptable scheme.

RECOMMENDATIONS

8. The majority of the Group recommends -

a. Continuation of TES and Supplement for a further year (subject to modifications to meet EEC requirements).

b. Extension of JRS to the whole country, on a one-year basis, with an increase in the weekly allowance from £26.50 to £28-£30 at Mr Booth's discretion.

c. Increase in the size of manufacturing firm eligible for SFES to 200 employees and extension of eligibility to Development Areas and Inner City Partnership Areas, but that if material reductions in TES have to be made, SFES should be available nationally, with higher payments in respect of firms in DAs and Inner City Partnership Areas.

d. An attempt to reach a negotiated settlement with the Commission on TES.

e. GEN 27 should consider proposals for a short time working compensation scheme (and any other proposals Ministers may put forward) as a possible substitute for reductions in TES.

S W

Department of Education and Science

24 January 1978 | 1 TDS on present basis | Full effect on unemployment register in 1979 | Gross annual cost (£m) | Net annual cost (£m) | Actual gross cost in financial years | |------------------------|---------------------------------------------|------------------------|---------------------|-------------------------------------| | | | | | 1978/9 | 1979/80 | 1980/81 | | 2 SFDS extended to companies with up to 200 employees | 115,000 | 223 | 0 | 115 | 105 | 3 | | - for whole country | 23,000 | 103.0 | 32.0 | 60 | 19 | 0 | | - for Assisted Areas | 9,550 | 43.0 | 12.6 | 26 | 8 | 0 | | - for Development Areas | 4,750 | 21.0 | 6.1 | 14 | 4 | 0 | | 3 Job Release Scheme on a national basis open to those within 1 year of retirement with | | | | | | | | - £40 allowance | 39,000 | 85.0 | 43.0 | 51 | 34 | 0 | | - £35 allowance | 30,000 | 57.0 | 21.0 | 34 | 23 | 0 | | - £26.30 allowance | 17,500 | 25.0 | 8.0 | 15 | 10 | 0 | | 4 Job release scheme on national basis open to those within 2 years of retirement with | | | | | | | | - £40 allowance | - 78,000 | 170.0 | 86.0 | 102 | 119 | 34 | CABINET

ECONOMIC OUTLOOK: CASE FOR REFLATION AND INCREASE IN PUBLIC EXPENDITURE

Memorandum by the Secretary of State for Social Services and the Minister for Social Security

INTRODUCTION

1. We are convinced that there is an overwhelming case, on economic and political grounds, for a substantial reflation. A major boost to public expenditure is needed as well as significant tax cuts.

ECONOMIC BACKGROUND

2. Industrial production is stagnant, unemployment is at an unacceptable (and costly) level. The deflation forced on us by the 1976 sterling crisis has been compounded by further unplanned deflation due to massive shortfall in public spending, and although tax reliefs have to some extent compensated for this the offset has come too late to avoid a fall in aggregate demand and a rise in the number of jobless.

3. The Trades Union Congress (TUC) call for a £3 billion budget boost composed of tax cuts and increased public spending, seems to us to be on target.

CASE FOR EXTRA BILLION POUNDS OF PUBLIC EXPENDITURE

4. Last year we drew Cabinet's attention to the prospect of a substantial public expenditure shortfall and it now appears likely that there will be another large shortfall this year. An extra billion of spending next financial year can be presented, at least in part, as designed to offset further excessive shortfall. It cannot convincingly be argued that it would damage international confidence.

5. Some forms of public expenditure, for example child benefits, have the same political attractions and broad economic effect as tax cuts. They give people extra money which they can spend themselves. And child benefit goes directly to seven million women who are particularly pressed by inflation. The woman's vote will be critical at the next election as it has been at earlier elections. Child benefit is also both presentationally and practically an effective way of tackling the problem of incentives to work: it raises the in-work incomes of families who might otherwise be better off (or only marginally worse off) unemployed.

6. Expenditure on improved public services is not only what people expect of a Labour Government but would be, at the present time, a direct form of job creation. The net cost after allowing for savings in unemployment benefits and extra revenue would be substantially less than the gross cost. And we can make sure that the jobs which are created are useful jobs which will benefit the community.

7. For all these reasons we should raise public expenditure programmes by the full amount demanded by the TUC. When we come to spend the money we will need to identify those areas where we are likely to be under the most damaging political attack at the time of the election:

   a. The level of unemployment will undoubtedly be a sensitive issue, and we will need a whole range of measures to improve our record.

   b. Our record on child support, where we have still to reach the level of provision made under the Heath Government, is bound to be under strong attack.

   c. The huge increase in school meal prices budgeted for September 1978 will involve an extra burden of about £1.30 for a family with two children at school. To go ahead with this knowing that an autumn election may be forced upon us, would be sheer folly.

   d. Of all the constraints we have put on public expenditure those on the health service have in our view led to the most damaging and continuing criticism.

CONCLUSION

8. We therefore invite our colleagues to agree that:

   a. a substantial reflation is needed in the next financial year - of the order of £3 billion in gross terms;

   b. although tax reliefs should be a main component, there must also be a package of spending measures for 1978-79 amounting to perhaps £1 billion gross;

   c. this package should comprise politically attractive measures such as cancellation of the school meal price rise, employment measures, a further contribution to relieve National Health Service pressures, and a November uprating of child benefit; and d. the cost of the measures should be covered from the Contingency Reserve plus, as necessary, an allowance for shortfall and/or such increase in the public sector borrowing requirement as is necessary to ensure that the Chancellor of the Exchequer has adequate headroom for his Budget.

Department of Health and Social Security

30 January 1978 CABINET

STATEMENT ON THE DEFENCE ESTIMATES 1978

Note by the Secretary of State for Defence

1. Attached is my draft statement on the Defence Estimates; the statement has been agreed by the Defence and Oversea Policy Committee subject to some minor revision which is now incorporated in the text.

2. I invite my colleagues to approve the text so that I may publish the statement on Wednesday 15 February.

F M

Ministry of Defence

30 January 1978 Draft Statement on the Defence Estimates 1978

## CONTENTS

### Chapter 1: DEFENCE POLICY

| Topic | Page | |----------------------------------------------------------------------|------| | Detente and Disarmament | 1 | | Deterrence and Defence | 6 | | Warsaw Pact Capability | 8 | | NATO Defence Effort | 10 | | United Kingdom Contribution to NATO | 14 | | United Kingdom Defence Budget | 17 | | Commitments Outside NATO | 20 |

### Chapter 2: COMBAT FORCES, DEPLOYMENTS, OPERATIONS, AND EXERCISES

| NATO | Page | |----------------------------------------------------------------------|------| | Royal Navy General Purpose Combat Forces | 1 | | The Nuclear Strategic Force | 2 | | Army Combat Forces | 2 | | Royal Air Force Combat Forces | 5 | | Exercises in support of NATO | 7 | | UNITED KINGDOM | | | Operations | 10 | | HM The Queen's Silver Jubilee Reviews | 15 | | REST OF THE WORLD | | | Deployments and Operations | 17 | | Service Assistance Overseas | 20 | | Exercises | 22 |

### Chapter 3: EQUIPMENT

| Industrial and Employment implications of the Equipment programme | 2 | | International Collaboration | 3 | | Production and Development | 5 | | Research | 24 | | Royal Ordnance Factories | 25 | | Defence Sales | 27 |

### Chapter 4: MANPOWER

| Recruitment, Re-engagement and Wastage, and Redundency | 1 | | Women's Services | 3 | | Reserves and Cadet Forces | 4 | | Pay and other Conditions of Service | 6 | | Defence Studies, Education and Training | 8 |

### Chapter 5: SUPPORT

| NATO Co-operation in Logistics | 2 | | Inter-Service Co-ordination of Support | 5 | | Royal Navy Support Organisation | 7 | | Army Support Organisation | 9 | | Royal Air Force Support Organisation | 10 | | Lands | 12 | | Living Accommodation | 13 | | Works | 14 | | Energy Conservation | 14 | | Movements | 15 | | Meteorology | 16 | | Other Support | 17 | DEFENCE POLICY

101. United Kingdom defence policy is based on the North Atlantic Alliance, which has worked well for more than a quarter of a century. The key principle of the North Atlantic Treaty, that an attack on one member is an attack on all, has provided far greater security than any member could have achieved alone. The United Kingdom shares the benefits and the obligations of membership. The Government's policy continues to be to concentrate our defence effort on the Alliance in the ways that can best contribute to the strength of the Alliance and thus to our own security.

102. Defence policy needs to be seen in the wider context of our international security aims, in the service of which defence is a partner with other aspects of policy. These include action to remove or alleviate the causes of international tension, and the continuing search to widen and strengthen multilateral arms control and disarmament wherever possible. The various aspects of detente and deterrence complement one another in reinforcing security. The Government is active in each of them, in close accord with our North Atlantic Treaty Organisation (NATO) Allies.

DETENTE AND DISARMAMENT

103. During the last twelve months there have been some encouraging advances in arms control prospects, notably in negotiations on a comprehensive nuclear test ban and, as a result of negotiations between the United States and the Soviet Union, on strategic arms limitation. Comprehensive Test Ban

104. Since July 1977 the United Kingdom has been negotiating with the United States and the Soviet Union towards a Comprehensive Test Ban Treaty. Our objective is a multilateral treaty banning all nuclear explosions, with effective verification and the adherence of as many states as possible, nuclear and non-nuclear. The negotiations have made good progress. We are now working to narrow the differences on the outstanding issues. We believe agreement can be achieved.

Strategic Arms Limitation Talks (SALT)

105. The interim agreement between the United States and the Soviet Union on the limitation of strategic nuclear arms expired on 3 October 1977, but both governments have said they will continue to act as though it were in force. Negotiations continue between them towards a new agreement and the United Kingdom Government attaches great importance to a successful outcome.

Mutual and Balanced Force Reductions (MBFR)

106. Despite constant efforts by the West, progress in the Vienna negotiations on the mutual and balanced reduction of forces in central Europe is disappointing. The agreed aim of providing greater stability at a lower level of forces without impairing the security of either side seems still a long way off.

107. Western proposals remain firmly based on the principle that force reductions should achieve approximate parity between the forces of the two sides in the area by establishing a common collective ceiling on Eastern and Western manpower. The Alliance proposes specific reductions on each side in forms designed to contribute as much as possible to stability in the area. The West estimates that in ground forces Eastern manpower exceeds Western manpower by more than 150,000, although the East claims that approximate parity already exists. To identify the reasons for this discrepancy the West has been pressing for a discussion of figures, and in July 1977 put forward proposals for a detailed exchange of data. Certain problems have still to be resolved, but it is hoped that an exchange can take place soon.

108. The MBFR negotiations are of great importance, and the Government will continue with its Allies to strive for an outcome that will genuinely enhance stability in Europe. The Government has no intention however, in advance of an agreement, of reducing the forces we maintain on the mainland of Europe in fulfilment of our Brussels Treaty obligations.

Conference on Security and Co-operation in Europe (CSCE)

109. The CSCE follow-up meeting opened in Belgrade in October 1977, following a preparatory meeting in the summer. The conference is considering the provisions of the 1975 Final Act. The ones of direct military relevance are the confidence-building measures, designed to reduce the risks of military miscalculation or misunderstanding.

110. Since the signing of the Final Act, NATO countries, and for the most part the neutral and non-aligned countries also, have implemented these measures in a liberal and forthcoming way. They have notified not only all major manoeuvres involving over 25,000 troops but a large number of smaller-scale manoeuvres (whose notification is discretionary). They have invited observers from CSCE participating states, including the Warsaw Pact countries, to many of their manoeuvres. Until just before the Belgrade meeting, the Warsaw Pact countries took a more restrictive line; for example, they refused all invitations to manoeuvres in NATO countries. More recently, however, they have begun to accept such invitations, and in January the United Kingdom was, for the first time, invited to send observers to a Soviet exercise. In Belgrade, British and other NATO representatives have drawn attention to the discrepancies in the implementation of this aspect of the Final Act. They have sought to develop confidence-building measures further, in particular by strengthening the commitment to notify smaller manoeuvres and movements, and by improving the conditions under which invited observers can operate. The United Nations Special Session on Disarmament

111. The Government looks forward to the United Nations Special Session on Disarmament to be held in May and June, and hopes it will improve the prospects for further measures. The United Kingdom has taken an active part in the preparatory work, and is putting forward some new proposals for action.

Other Arms Control and Disarmament Measures

112. The United Kingdom continues to attach great value to the 1968 Treaty on the Non-Proliferation of Nuclear Weapons, and has continued its efforts to persuade further states to accede to it, and to promote other arrangements to reduce the risk of the spread of nuclear weapons. The Government is playing an increasingly active part in efforts to achieve progress on arms control in the United Nations, the Conference of the Committee on Disarmament (CCD) and elsewhere. Many of these negotiations are entering important new phases.

113. The British draft convention on banning the development, production and stockpiling of chemical weapons and destroying them, tabled in the CCD in 1976, has been further debated. Faster progress may be possible when current consultations between the United States and the Soviet Union are completed. Last May the United Kingdom signed the Convention on the prohibition of military or any other hostile use of environmental modification techniques, which had been negotiated by the CCD and endorsed by the UN General Assembly.

114. 1977 also saw the first Review Conference of the Treaty banning the placing of nuclear weapons and other weapons of mass destruction on the seabed. The United Kingdom welcomed the Conference's re-affirmation of the parties' support for the Treaty.

115. The United Kingdom and the Soviet Union signed in October 1977 a treaty on the Prevention of Accidental Nuclear War. Each party undertakes to maintain and where necessary improve its safeguards against the unauthorised or accidental use of nuclear weapons, and to notify each other immediately of any incident. The Treaty came into force on 10 October 1977, and is similar in purpose to existing agreements between the United States and the Soviet Union, and France and the Soviet Union.

116. The United Kingdom has also, with a public explanation of its position on them, signed two Protocols to the 1949 Geneva Conventions. These Protocols extend and bring up to date the provisions of the Geneva Conventions and the 1907 Hague Rules of Warfare. They significantly improve the protection given to the victims of war.

DETERRENCE AND DEFENCE

117. The realities of today's world mean that, however high our hopes and desires, we cannot responsibly assume that our efforts for detente and disarmament will be enough on their own to ensure adequate security. A major defence effort is also needed, and is indeed a precondition of successful political action. We must therefore continue to make a proper contribution to NATO's strategy of deterrence.

118. For effective deterrence the Alliance needs to convince any aggressor that the use of force, or the threat of its use for political ends, carries risks far outweighing any likely advantage. NATO's deterrent strategy is based on forward defence and the capability of flexible response. Forward defence means that NATO is committed to defend the full territorial integrity of its members and to halt any attack at the earliest possible point. Flexible response means that NATO must have a range of military options wide enough to ensure that whatever form aggression took NATO would have the ability to meet it effectively without having to face an intolerable choice between conceding defeat and using dangerously excessive force from the start. For this purpose NATO deploys three main levels of forces – conventional, theatre nuclear and strategic nuclear. The three levels are inter-dependent, and successful deterrence requires a balanced combination of them.

119. The Alliance must have a strategic nuclear capability broadly equivalent to that of the Soviet Union. Theatre nuclear weapons are needed to deter the use of similar weapons by the Soviet Union and, through their links with the conventional defence on the one hand and the strategic forces on the other, to complete the range of deterrence by showing NATO's resolve to respond at whatever level might be necessary. The use of nuclear weapons would be a matter for the closest political control, but the knowledge that they will be used if necessary to stop aggression is an essential element in deterrence. Finally, without a strong conventional capability the Alliance would be bound to rely heavily on nuclear weapons, so reverting to the "tripwire" strategy abandoned in the 1960s. Such reliance would lower the "nuclear threshold", and seriously weaken the overall credibility of deterrence. WARSAW PACT CAPABILITY

1.20. The forces which NATO needs to implement this deterrent strategy must depend in large measure upon the scale and character of the potential military threat posed by the forces of the Soviet Union and its Warsaw Pact allies. The capability of these forces is formidable and growing.

1.21. The assessment of military balance is complex and many-sided, and cannot be reduced to a single neat ratio. On any view, however, Soviet forces have in many areas been strengthened in size and quality on a scale which goes well beyond the needs of any purely defensive posture. Figures 1-4 illustrate the substantial growth of Soviet forces since 1968 and the current balance of NATO (excluding French forces) and Warsaw Pact forces in the eastern Atlantic and central Europe, two areas crucial to NATO and to the United Kingdom. The comparisons in Figures 3 & 4 can illustrate only a broad trend. They do not reflect two particular factors of concern to NATO, the state of readiness of Warsaw Pact forces in Europe, which has always exceeded that of NATO forces and has recently been improved, and the continued introduction of advanced new equipment. Nor do they take into account geography, deployment, logistic support, strategy and tactics, training and morale. Beyond Europe recent developments in Africa, for example, have shown that the Soviet Union is ready and able to deploy military resources rapidly in support of its political interests in the Third World; this demonstration of conventional capability is a further factor which must be taken into account.

1.22. In the last five years Soviet naval forces have received new classes of submarines, surface ships and aircraft. These include INCREASES in the STRENGTH of SOVIET FORCES in the EASTERN ATLANTIC (the SOVIET NORTHERN FLEET)

**SUBMARINES** (including Ballistic Missile Submarines)

- 1968: 44 Nuclear-powered
- 1977: 104 Nuclear-powered
  - Increase: +136%
  - 1977: 184

**CRUISERS and DESTROYERS**

- 1968: 6 Missile-armed
- 1977: 23 Missile-armed
  - Increase: +283%
  - 1977: 36

**FRIGATES and ESCORTS**

- 1968: 45
- 1977: 65
  - Increase: +44%

**FIXED-WING MARITIME AIRCRAFT**

- 1968: 170
- 1977: 220
  - Increase: +29% INCREASES in the STRENGTH of SOVIET FORCES in CENTRAL EUROPE

**MAIN BATTLE TANKS**

- 1968: 7,250
- 1977: 9,500
  - Increase: +31%

**ARTILLERY**

- 1968: 3,200
- 1977: 4,400
  - Increase: +38%

**ARMoured PERSONNEL CARRIERS** (including Reconnaissance and Command variants)

- 1968: 5,300
- 1977: 9,500
  - Increase: +78%

**FIXED-WING TACTICAL AIRCRAFT**

- 1968: 1,655
- 1977: 1,975
  - Increase: +20% The **CURRENT BALANCE** of **READY FORCES** in the **EASTERN ATLANTIC**

| NATO | Warsaw Pact | NATO-Warsaw Pact | |------|-------------|------------------| | **SURFACE SHIPS** | | | | | | 1-1.7 | | **SUBMARINES** | | | | | | 1-1.7 | | **FIXED-WING TACTICAL AIRCRAFT** | | | | | | 1-1.5 | The **CURRENT BALANCE** of **READY FORCES** in **CENTRAL EUROPE**

| | NATO | Warsaw Pact | NATO-Warsaw Pact | |------------------|------|-------------|------------------| | **TOTAL SOLDIERS** | ![NATO soldiers](image) | ![Warsaw Pact soldiers](image) | 1-1.3 | | **SOLDIERS IN FIGHTING UNITS** | ![NATO soldiers](image) | ![Warsaw Pact soldiers](image) | 1-1.3 | | **MAIN BATTLE TANKS** | ![NATO tanks](image) | ![Warsaw Pact tanks](image) | 1-2.9 | | **ARTILLERY** | ![NATO artillery](image) | ![Warsaw Pact artillery](image) | 1-2.6 | | **FIXED-WING TACTICAL AIRCRAFT** | ![NATO aircraft](image) | ![Warsaw Pact aircraft](image) | 1-2.4 | Delta I and II nuclear-powered ballistic missile submarines, Charlie II nuclear-powered cruise missile submarines, Victor II nuclear-powered torpedo attack submarines, Tango diesel submarines, Backfire bombers for the Naval Air Force, and the Kiev class of aircraft carriers.

123. Soviet ground forces have been strengthened by large numbers of self-propelled artillery, new tanks, infantry combat vehicles, helicopters (some of them very heavily armed) and missiles of advanced design.

124. Major re-equipment programmes have markedly increased the range and weapon-load of Soviet aircraft. Modern swing-wing aircraft such as Fencer and Flogger have entered service, and Backfire has joined the Long-Range Air Force. New armaments and better avionics for reconnaissance, target acquisition and weapon aiming have been introduced.

125. The East German, Polish and Czech armies are being strengthened by more and better equipment, mainly of Soviet origin, such as air-defence missiles, armoured personnel carriers, artillery and obstacle-crossing equipment. In addition, East Germany has received modern assault helicopters and air-defence aircraft. Poland and Bulgaria have new swing-wing tactical aircraft, and Hungary more modern air-defence aircraft.

126. We do not know the exact amount of Soviet military expenditure. The Soviet Union does not reveal figures which could be accepted as comparable with Western defence budget information, and has not been willing to take part in the UN Secretary-General's proposals for a pilot study on standardised reporting of military expenditure. Careful Western assessments suggest however that, on the definitions customary in NATO of what constitutes military expenditure, the scale of Soviet military effort could not be sustained without a continuing resource allocation of the order of 11-13% of Soviet gross national product. It is clear that a very large proportion of the total goes on new weapons systems including an immense high-technology research and development programme over the entire range of military equipment. The Soviet Union also has very large resources of trained military manpower, based on universal conscription with a minimum period of two years' full-time service.

127. Much of the Soviet equipment now reaching the front line in such large numbers no doubt derives from decisions taken several years ago. There is however no sign that more recent developments in the field of detente are leading the Soviet Government to slacken the pace of its military effort.

NATO DEFENCE EFFORT

128. There has been a clear and collective recognition by NATO member Governments, at the highest level, of the need for an appropriate NATO response to the continuing growth of the military capability of the Warsaw Pact. The Alliance's commitment to the deterrent strategy of forward defence and flexible response, based on the triad of force elements, has been strongly re-affirmed, notably by President Carter.

129. The past year has been an extremely busy and productive one for NATO's defence planning work. The Ministerial meeting of the Defence Planning Committee (DPC) in December 1976 accepted that further measures would be needed to reverse the unfavourable trends in the military balance. All member countries have accordingly reviewed their defence contributions for specific force improvements and commitments to strengthen NATO's conventional defence, particularly in the fields of anti-armour and anti-submarine warfare and air defence. Improvements are in hand in all three fields, and national plans will bring further improvements.

130. In May 1977 NATO Defence Ministers took three important steps. First, they agreed to the terms of the 1977 DFC Ministerial Guidance for 1979 to 1984, the key document for national and NATO planning. Member nations were asked to aim at an annual increase in real terms of defence expenditure in the region of 3% from 1979, although it was recognised that for some countries economic circumstances would affect what could be achieved while present levels of force contribution might sometimes suggest bigger increases.

131. Secondly, as agreed at the North Atlantic Council meeting of Heads of State and Government in London in May, the Alliance will undertake a long-term defence programme to make NATO forces better able to meet the needs of the 1980s. Studies are being carried out in ten priority areas: readiness; reinforcements; mobilisation of reserves; maritime strategy; air defence; communications; command and control; electronic warfare; rationalisation (including inter-operability and standardisation); consumer logistics (including war reserve stocks); and the modernisation of theatre nuclear forces. A consolidated report is to be considered by the NATO Summit meeting in the spring of 1978. Finally, to complement this effort, NATO Defence Ministers have agreed on an immediate programme of short-term measures, to be implemented by the end of 1978, in anti-armour defence, war reserve munitions and readiness and reinforcement. At their meeting in December 1977 they endorsed significant improvements to be made in all three areas. The Alliance will for example increase its holdings of anti-armour missiles by about one third by the end of 1978, and similar improvements in stocks of other critical munitions are planned. The United Kingdom is making improvements in each of the areas. A second Royal Marine Commando group will be trained for mountain and Arctic warfare by April 1978, a year earlier than previously planned, and 41 Commando, Royal Marines has been retained and assigned to NATO. It has recently been decided to restore HMS Bulwark to full operational status. A number of reserve helicopters have been earmarked to NATO for anti-submarine warfare and certain Naval communications and training aircraft have been earmarked for general maritime support and utility duties. The Army is increasing the number of Milan anti-tank missiles being deployed to front-line units in 1978 and raising stock levels of other anti-armour equipment. The decision to buy TOW, the helicopter-borne missile, will advance by two years a major improvement in anti-tank capability. Additional armoured, artillery and infantry units are to be made available as reinforcements, and improvements are being planned for reserve mobilisation and the reinforcement of the British Army of the Rhine (BAOR). In addition the rundown in Army manpower has been reduced by 1900 men to compensate for the effects of continuing emergency commitments, especially in Northern Ireland; this will make it possible to improve readiness and to raise standards of training in NATO-assigned units. The Royal Air Force will be building up its medium-range air-to-air missiles and war reserve stocks of sonobuoys, increasing the wartime strength of RAF Regiment field squadrons in central Europe, markedly improving the rates of utilisation of the Harrier, and pre-stocking equipment for selected reinforcement squadrons. Several of these measures are improvements or additions to NATO's proposals. In addition the United Kingdom continues to play a substantial part in the programme of joint NATO exercises.

Alliance Co-operation

133. The 1977 DPC Ministerial Guidance stresses that NATO's resources will be employed to the best effect if, in the development of national plans and programmes, full account is taken of the collective needs of the Alliance. The United Kingdom shares this view, participates fully in Alliance collaborative activities, and attaches the highest importance to the efforts the Alliance is making to increase standardisation and interoperability of equipment.

134. Working within the framework of the Alliance, the Eurogroup continues to provide an important forum for strengthening the European contribution. Eurogroup sub-groups are making steady progress in co-operation on logistic support, battlefield communications, harmonisation of tactical concepts, training and medical services. The independent European Programme Group (EPG), which is recognised by all its members as the main forum for equipment collaboration in Europe, is also making steady progress. It maintains a schedule of member countries' requirements for equipment over the next 15 years to help identify possibilities for collaboration, and has set up eleven project groups to study possible future projects including tactical combat aircraft, helicopters and anti-tank weapons.

135. Another example of Alliance-wide co-operation is the NATO infrastructure programme, which covers fixed installations needed for the deployment and operation of the armed forces. NATO Defence Ministers agreed in May 1977 to additional funding for the 1975-79 period so that a bigger programme will be financed on a NATO basis according to the agreed cost-sharing formula. The main elements of the NATO programme are airfields, including hardened shelters for protecting aircraft; communications, including the development of the NATO integrated system to facilitate political consultation and improve command and control by the NATO military authorities; the NATO Air Defence Ground Environment, covering the whole of NATO Europe, for early warning of and response to hostile aircraft and missiles; and an oil pipeline system from Atlantic and Mediterranean ports to airfields and other installations.

UNITED KINGDOM CONTRIBUTION TO NATO

136. The United Kingdom contributes to each of the elements of NATO's triad of forces and to each major NATO Commander. Our military effort is mainly directed to the four areas where we can best help Alliance defence - the defence of the United Kingdom base and its immediate approaches; the eastern Atlantic and Channel; the Central Region of Europe; and NATO's nuclear capability: The United Kingdom base provides vital support for British forces assigned to NATO, including reinforcements for Allied Command Europe (ACE) and aircraft of RAF Strike Command available to support operations by all three Major NATO Commanders. It also provides base facilities for United States forces stationed in this country or brought in as reinforcements.

The United Kingdom contributes by far the largest part of NATO's readily available maritime forces in the eastern Atlantic and Channel. In addition to Nimrod maritime patrol, Buccaneer strike/attack, Phantom air-defence and Vulcan and Canberra reconnaissance aircraft, virtually the whole of the Royal Navy - the third largest in the world - is assigned to NATO.

In the Central Region of Europe the United Kingdom provides the 55,000 men of BAOR, which can be more than doubled in an emergency. BAOR is equipped with over 600 Chieftain tanks and over 2,000 other armoured fighting vehicles. In addition, twelve squadrons of RAF aircraft are based in Germany in the strike/attack, tactical reconnaissance, air-defence and support roles. These forces play a vital role in NATO's forward defence.

The United Kingdom provides theatre nuclear forces deployed by all three Services and also contributes with the Polaris force to NATO's strategic nuclear capability. 137. British forces also make an important contribution to the Strategic Reserve of the Supreme Allied Commander Europe (SACEUR) including the United Kingdom Mobile Force (UKMF), land and air contributions to the ACE Mobile Force (AMF), and three regular squadrons of the Special Air Service. Royal Marines Commando forces provide reinforcements primarily for NATO's Northern Region.

138. The equipment of all these forces is being constantly improved. The first of a new class of anti-submarine cruisers for the Royal Navy, HMS Invincible, was launched in May 1977, and a second is being built. There is a continuing construction programme of nuclear-powered fleet submarines, with nine now in service, a tenth due to enter service shortly, three more being built, including the first of the new Trafalgar class, and the second of this class due to be ordered this year. The Royal Navy is the only European NATO navy to operate nuclear-powered fleet submarines. The Navy's older frigates and destroyers are being replaced by three new classes, the Type 21 and Type 22 frigates and the Type 42 destroyer, and older minesweepers and minehunters by the advanced Hunt class mine countermeasure vessels. Complementing these new ship classes are new weapons and equipments including the Sea Dart and Sea Wolf guided-missile systems, and Sea Harrier aircraft.

139. For the Army, a new 155mm field howitzer, the FH70, is being produced in collaboration with the Federal Republic of Germany and Italy, and a self-propelled version, the SP70, is in joint development. The Franco-German Milan anti-tank missile is being Procured, together with the American TOW for the helicopter-borne anti-tank role. The British anti-aircraft missile systems, Rapier and the man-portable Blowpipe, are in service in BAOR. Further improvements are being made to Chieftain main battle tank.

The main feature of the RAF equipment programme is the acquisition of 385 Tornado multi-role combat aircraft. In March 1977 the decision was taken to develop the Nimrod airborne early warning (AEW) aircraft, which are planned to be interoperable with, and complementary to, whatever AEW system the rest of the Alliance adopts. The maritime patrol Nimrods will be extensively re-equipped by the early 1980s and the Royal Air Force will also get improved short-range air-to-air missiles (Sidewinder AIM 9L) and a new anti-surface ship missile. New medium-range air-to-air missiles (Skyflash) are already in production.

Further details of equipment programmes are given in Chapter 3. On the latest NATO figures the United Kingdom spent a higher proportion of her defence budget (21.8%) on major new equipment in 1977 than any other of the eleven Allies covered by the survey. We also maintain a wide-ranging research and development programme, accounting for 13% of the defence budget.

UNITED KINGDOM DEFENCE BUDGET

At the end of 1976 the Government decided that defence must contribute towards the reductions in public expenditure required to strengthen the United Kingdom economy. The defence budget for 1978/79 was reduced by £230 million, equivalent to £267 million at 1977 Survey prices. The Government undertook to consult NATO about how to make the savings with the minimum adverse effect on our front-line contribution to the Alliance and its essential support. Detailed proposals were put to NATO in June, and in August there were staff discussions between the Ministry of Defence and NATO. In September Alliance views were conveyed to the Government by the NATO Secretary-General. The Alliance expressed concern at the cumulative effect of successive reductions in the defence budget, but acknowledged the Government's success in keeping to a minimum the effect of the £267 million reduction on our contribution to front-line forces.

In reply, the Government welcomed the Alliance's agreement to the method of making the saving, and emphasised the large continuing contribution made by the United Kingdom to the Alliance. As Figure 5 shows, United Kingdom defence expenditure in 1977 accounted for 4.9% of gross domestic product (GDP) at market prices, compared with 5.7% the previous year. Figure 5 also shows NATO countries' defence expenditure in dollar terms. These statistics use market exchange rates, which do not necessarily reflect the true relative purchasing powers of individual currencies and so are not a complete guide to comparative resource allocation to defence.

The proposals put to the Alliance for achieving the £267M saving (reduced to £261M as a result of the 1977 Public Expenditure Survey) were refined during the course of scrutiny of 1978/79 Estimates. About half of the saving will come from the equipment programme, about one fifth from works and accommodation stores, and the balance from miscellaneous changes including offset receipts (see paragraph 146). For the years after 1978/79 the Government proposes to respond positively to NATO's call for increased resources for defence and to meet the target set for increased expenditure in 1979/80. Plans for future levels of defence expenditure agreed in the 1977 Public Expenditure Survey and published in Cmd 7049 provide for increases in the defence budget of 3% in 1979/80 compared with the previous year, and a further 3% in 1980/81. The provision for 1980/81 is subject to review in the 1978 Public Expenditure Survey in the light of economic circumstances. The 1981/82 figure is for the time being simply a repeat of that for 1980/81; no decisions have been taken, since it will be necessary before reaching conclusions to take account of developments in arms control and defence as well as in the economy.

The Defence Budget Estimates for 1978/79 total £6,919 million and are the equivalent in real terms of the target of £6,286 million at 1977 Survey prices. The latter figure incorporates the £8 million defence share of the extra expenditure to help the construction industry announced on 26 October 1977, and allows for receipts under the offset agreement concluded with the Federal Republic of Germany in October 1977 and described in Cmd 6970. Pay and Price increases account for £633 million (see Table 1 of Annex A). The defence budget is about 4.2% of the estimated GDP at market prices for 1978/79.

The proportionate shares in the Estimates of major categories of expenditure - manpower, equipment, and buildings and miscellaneous stores and services - are shown in Figure 6. Comparisons: NATO Countries 1977

- **US**: Defence expenditure as a percentage of GDP (market prices)
- **UK**: Total defence expenditure (US $ million)
- **FRANCE**: Per capita defence expenditure (US $)
- **FRG**: Defence expenditure as a percentage of GDP (market prices)
- **BELGIUM**: Total defence expenditure (US $ million)
- **NETHERLANDS**: Per capita defence expenditure (US $)
- **PORTUGAL**: Defence expenditure as a percentage of GDP (market prices)
- **NORWAY**: Total defence expenditure (US $ million)
- **DENMARK**: Per capita defence expenditure (US $)
- **ITALY**: Defence expenditure as a percentage of GDP (market prices)
- **CANADA**: Total defence expenditure (US $ million)

**Notes:**

1. These figures, which are provisional, have been compiled by NATO.
2. The expenditure and per capita figures are based on average exchange rates for the first 6 months of 1977.
3. Up to date information is not available for Greece and Turkey. COMMITMENTS OUTSIDE NATO

The Armed Forces also meet the commitments of the United Kingdom Government outside NATO, including those which involve the security of dependent territories. Units of the Army and the Royal Air Force provide a garrison for the external defence of Belize; and a Royal Marines detachment remains in the Falkland Islands. In the Far East units of all three Services provide a garrison for the security of Hong Kong and a Gurkha battalion is stationed in Brunei. In the Mediterranean, British forces are stationed in Gibraltar, in Malta until 1979, and in Cyprus to meet... our commitment to the United Nations Force and to provide for the security of the Sovereign Base Areas. Ships and aircraft of the Royal Navy and the Royal Air Force deploy outside the NATO area from time to time and take part in exercises with other countries. In 1977, it was necessary for forces to be deployed rapidly to Belize and to Bermuda. Freedom of the Atlantic is vital to the security of NATO and the United Kingdom. All the United Kingdom's major ships and amphibious forces are therefore assigned to NATO and would, in time of tension or war, be concentrated in the eastern Atlantic and Channel areas. In addition to important air-defence and anti-surface ship roles, their task would be to meet the threat from the large Soviet submarine fleet, an increasing proportion of which is nuclear-powered, to ensure that important supply routes are kept open and that Allied reinforcements get through. Their task also includes meeting the threat of mines in coastal waters and keeping open the submarine deployment routes. United Kingdom naval forces are under the command of Commander-in-Chief Fleet, who is also a major NATO Commander as the Commander-in-Chief Channel, and a subordinate NATO Commander (to the Supreme Allied Commander Atlantic) as the Commander-in-Chief Eastern Atlantic.

The activities of Soviet naval and air forces operating around the United Kingdom, in the Atlantic and in the Mediterranean continue to be monitored by ships and aircraft of the Royal Navy and the Royal Air Force. In spring 1977 this task included the surveillance, in conjunction with our NATO Allies, of the large Soviet exercise in the northern Atlantic and the Norwegian and Baltic Seas. 203. Ships of the Hydrographic Survey Fleet have carried out surveys to meet specific defence requirements, to improve both our own and NATO's maritime operational capability and to enhance the safety of international navigation.

204. The Royal Marines Commando forces, as a result of the decision not to disband 41 Commando, now consist of a brigade headquarters and four Commandos with combat, helicopter and logistic support.

THE NUCLEAR STRATEGIC FORCE

205. The United Kingdom's Polaris submarines, HMS Renown, Repulse, Resolution and Revenge, between them maintain a continuous patrol and constitute an integral part of NATO's strategic nuclear force.

ARMY COMBAT FORCES

206. The Army combat forces consist of the Regular Army and, after mobilisation, the Regular Reserves and Territorial and Army Volunteer Reserve (TAVR). The Regular Reserves comprise ex-Service personnel who are, for a specified period after their return to civilian life, liable for recall in an emergency. The TAVR consist of men and women, not necessarily with previous Regular Army service, who have accepted liability for mobilisation in an emergency.

207. Some 70% of the Regular and Reserve army will, in time of war, be deployed to the European mainland, and most of the remainder will remain to defend the United Kingdom. Not only is the protection of the United Kingdom of the greatest importance in itself, but it is vital for the reinforcement and support of forces deployed on the mainland of Europe and as a base from which to conduct maritime and air operations.

208. Improved arrangements for the recall of Army Regular Reservists are under examination which would significantly reduce the time required for their mobilisation.

British Army of the Rhine

209. First (British) Corps (1 (BR) Corps) is the main combat element of BAOR and forms part of the Northern Army Group (NORTHAG) which, as part of Allied Forces Central Europe (AFCENT), is responsible for a vital sector of the Central Region. The reorganisation of 1 (BR) Corps referred to in detail in previous Statements on the Defence Estimates will have, for the most part, taken place by 1 April 1978 and will be complete by 1 April 1979. 1 (BR) Corps will then consist in peace-time of four armoured divisions, an artillery division and the 5th Field Force (less certain elements).

Berlin Field Force

210. The Berlin Field Force, some 3,000 strong, is not assigned to NATO but fulfils the United Kingdom commitment to the security of the Western sectors of Berlin. United Kingdom Land Forces

211. The reorganisation of the United Kingdom Land Forces (UKLF) mentioned in last year's Statement on the Defence Estimates will be virtually complete by 1 April 1978. The 8th Field Force became operational on 1 April 1977 and the 6th and 7th Field Forces assume their operational roles on 1 April 1978. The elements of the Regular Army based in the United Kingdom, the Regular Reserves and the TAVR will then fulfil the following roles:

a. Reinforcement of BAOR to its war establishment. The reinforcements include the 7th Field Force; other units stationed in the United Kingdom in peace-time including certain TAVR units; individuals from the training and support organisation; and a part of the Regular Reserves.

b. Contribution to SACEUR's Strategic Reserve and to SACLANT. The Army's contribution to SACEUR's Strategic Reserve is available for deployment throughout ACE and consists of: some 1,800 men as the United Kingdom contribution to the land component of the AMF; the land component of the UKMF, comprising the 6th Field Force and the Logistic Support Group; and the 22 Special Air Service Regiment. In addition the Army provides support and logistic troops for the Royal Marine Commando forces assigned to SACLANT. c. Defence of the United Kingdom. Each District within the United Kingdom contains forces, drawn from the Regular Army and the TAVR, which, together with the 8th Field Force, have specific responsibilities for the protection of vital NATO and national installations and bases. Manpower released from the training and support organisation together with the remainder of the Regular Reserves will further supplement these forces on mobilisation.

ROYAL AIR FORCE COMBAT FORCES

212. RAF combat forces are organised in two operational commands - Strike Command, whose Commander-in-Chief also holds the NATO appointment of Commander-in-Chief United Kingdom Air Forces, and RAF Germany, whose Commander-in-Chief is also Commander of the Second Allied Tactical Air Force which is part of Allied Air Forces Central Europe. Virtually all RAF combat and support aircraft are assigned to NATO. In the strike/attack and reconnaissance roles the Jaguar front-line force has been built up to strength and other front-line aircraft strengths have been maintained over the past year.

Strike Command forces in the United Kingdom

213. Strike Command forces stationed in the United Kingdom are committed to the support of all three major NATO Commanders: SACEUR, SACLANT and Commander-in-Chief Channel. Their task is the air defence of the United Kingdom, including the operation of the Fylingdales Ballistic Missile Early Warning Station as part of the contribution to the NATO-wide early warning system, and air support for land and sea operations in the main NATO command regions, including a range of deployment options throughout ACE as part of SACEUR's Strategic Air Reserve.

214. Strike Command forces are arranged in four functional groups. No 1 Group aircraft operate in the strike/attack and reconnaissance roles over land and sea, with Vulcan B2's and Buccaneers for strike/attack, Vulcans and Canberras for reconnaissance, and the Victor tanker force in support. No 11 Group is responsible for air defence with Phantom and Lightning aircraft supported by Bloodhound and Rapier surface-to-air missiles, Shackleton AEW aircraft and ground radar. No 18 Group, with headquarters co-located with Northwood with those of the Commander-in-Chief Fleet, comprises Nimrod maritime patrol and anti-submarine aircraft, increased from 1 January 1977 by four aircraft to allow for additional offshore surveillance and fishery protection duties, together with Wessex and Whirlwind helicopters in the search and rescue role. No 38 Group is responsible for reinforcement of ACE with Jaguar and Harrier offensive-support aircraft and Jaguar reconnaissance aircraft, as well as for the transport force of VC10's, Hercules and Wessex and Puma helicopters. The RAF Regiment also provides, within the United Kingdom, a squadron committed to NATO for low-level air defence, and field squadrons for ground-defence duties. RAF Germany

215. RAF aircraft and surface-to-air missile systems in Germany are assigned to SACEUR and form part of the Second Allied Tactical Air Force. Buccaneers and Jaguars operate in the strike/attack role and Jaguars also have reconnaissance responsibilities. The vertical and short take-off and landing Harriers operating from dispersed field sites provide offensive air support and tactical reconnaissance for NORTHAG. Phantoms are available for air defence and Bloodhound surface-to-air missiles provide area defence of airfields. The RAF Regiment operates the Rapier surface-to-air air-defence missile systems and is engaged in the local ground defence of RAF airfields and of the Harriers in the field. A squadron of Wessex helicopters supports 1 (BR) Corps and from 1 April 1978 a further Wessex squadron will also be available for reinforcement.

EXERCISES IN SUPPORT OF NATO

216. All three Services have continued to make significant contributions to NATO exercises in 1977. Within ACE, emphasis has again been placed on the AUTUMN FORGE exercise series, a collection of exercises designed to demonstrate NATO integration and flexibility. Emphasis has also again been placed on the training of Regular and TAVR soldiers from the United Kingdom, and this year over 40,000 of them trained on the European mainland. A recent measure to improve the value of exercises has been a study designed to make better use of expensive resources by integrating national and NATO exercises.

**Eastern Atlantic Area**

217. An important NATO maritime exercise, OCEAN SAFARI 77, was staged last October in the Iberlant and Eastlant areas and southwest approaches to the United Kingdom. The United Kingdom contribution to this exercise comprised 16 warships, including HMS Ark Royal, HMS Hermes and the frigate assigned to the Standing Naval Force in the Atlantic, together with eight Royal Fleet Auxiliaries and 13 RAF squadrons. The exercise was designed to demonstrate NATO's determination and ability to retain control of sea lanes vital to this country and to the reinforcement of Europe.

**Northern Region**

218. The 6th Field Force and the United Kingdom contingent of the AMF participated in Exercise ARROW EXPRESS in Denmark in September 1977, practising co-operation between the Danish Army and external reinforcements. Similarly, the United Kingdom will take part in Exercise ARCTIC EXPRESS in March 1978, demonstrating NATO's ability to reinforce the northern flank. The Royal Navy, Royal Marines, the Army and the Royal Air Force will all be involved, exercising winter warfare techniques which have been practised in Norway previously.

**Central Region**

219. BAOE units have participated in three NATO and ten national exercises each involving two or more battlegroups. The annual Central Region air exercise, COLD FIRE 77, took place last September. All RAF squadrons in Germany together with some United Kingdom-based squadrons were involved, and the United Kingdom Air Defence Region was fully tested.

Southern Region

220. All three Services took part in Exercise DAWN PATROL 77 in the Mediterranean. Naval, air and amphibious forces were involved in the region-wide Exercise DISPLAY DETERMINATION 77 to practise external reinforcement to the region and the transfer of command of naval forces across NATO command boundaries. In November 1977 Exercise AVON EXPRESS, which involved contingents of the AMF from five NATO countries, was held on Salisbury Plain. UKLF provided a comprehensive support organisation including elements of the 6th Field Force as exercise enemy forces.

Other Exercises in support of NATO

221. The United Kingdom has contributed to a wide range of smaller exercises in support of NATO ranging from the western Atlantic to the northern flank and eastern Mediterranean. As a means of providing maritime training for both our own and NATO forces, the Royal Navy and Royal Air Force have also conducted a programme of joint maritime courses, well supported by our NATO Allies. Royal Navy mine-countermeasures forces and headquarters concerned with the naval control of shipping have conducted a full programme of exercises, involving also the Royal Naval Reserve, and the Royal Marines have exercised with their counterparts in five NATO countries, including arctic warfare training in Norway and three exercises with sub-units of the Royal Netherlands Marine Corps.

222. Despite the Army's continued commitment in Northern Ireland, six battlegroups from BAOR and one from UKLF carried out tactical firing exercises at Suffield in Canada. Three battalion groups from UKLF also exercised at Weinwright in Canada, one of them taking part in a Canadian brigade exercise. Army units have also exercised in support of their NATO role in the United States, the Federal Republic of Germany, Denmark, Norway, Italy and France. These bilateral exercises have contributed towards better mutual understanding and co-operation, which will lead to improved operational efficiency within NATO.

223. A RAF detachment of Buccaneer and Vulcan aircraft deployed to Nellis Air Force Base in the United States to use the American Red Flag range facilities, gaining valuable training in a simulated hostile environment. 21 RAF squadrons based in the United Kingdom and Federal Republic of Germany utilised the NATO squadron exchange scheme to improve operating techniques. RAF air transport units also held exercises with the American and Canadian air transport forces to practise joint procedures.

UNITED KINGDOM OPERATIONS

Northern Ireland

224. The Government's policy for security in Northern Ireland continues to be based on the development of the Royal Ulster Constabulary (RUC) as the instrument for the maintenance of law and order. The Armed Forces, including the Ulster Defence Regiment (UDR), will remain as the essential buttress of this policy for as long as is necessary. The Armed Forces have maintained their high standards of courage, resourcefulness and effectiveness and last year 20 awards for gallantry were made to personnel serving in Northern Ireland.

225. In June 1977 the Secretary of State for Northern Ireland announced measures to increase the effectiveness of the Government's security policy. These included an increase in the full-time establishment of the UDR, a continuing build-up in the strength of the RUC, a greater emphasis on the acquisition of intelligence and a strengthening of the laws against terrorist offences. There has been a progressive reduction in the general level of violence during the year, with a marked fall in the number of civilian casualties and of shooting and bombing incidents, and increasing success in bringing law-breakers to justice.

In 1977 1308 people were charged with terrorist-type offences, including 266 with murder or attempted murder. The security forces found 590 firearms, 52,091 rounds of ammunition and 2.7 tons of explosive (including neutralised devices). Regrettably there has been no reduction in the scale of security forces deaths since 29 service personnel including 14 members of the UDR have given their lives.

226. All three Services of the Armed Forces are involved in maintaining security, but the Army inevitably bears the main responsibility for providing assistance and support to the police, though the Royal Marines have also been involved in the infantry role. The force level remained at around 14 major units of the combat arms until early 1978 when it was reduced to 13. Reinforcements were called in as necessary to meet the security requirements. A major reinforcement of 3,000 men, including three infantry battalions, was deployed primarily by the RAF air transport force at the time of the United Unionist Action Council (UUAC) strike in May 1977. A total of 47 major units served during 1977. Nine major units have now completed six tours of duty there and six units have completed seven tours. Coastal and lough patrols are carried out by the Royal Navy and Royal Marines to deter the smuggling of arms and the Royal Air Force provides reconnaissance facilities, and, together with the Royal Navy, personnel and logistic air transport support and tactical mobility for the security forces. The RAF Regiment provides protection for the airfield at Aldergrove and for the radar unit at Bishop's Court.

The strength of the UDR at 1 January 1978, including both full-time and part-time members, was 7,812, of which 701 were women. In addition to routine operations, the UDR continues to provide a company-size force each weekend for deployment anywhere in the Province. The UDR now provides immediate military support for the RUC, wholly or in part, in 11 Police Divisions thus... demonstrating the importance of this largely part-time body in the maintenance of security in Northern Ireland. In 1977 elements of five UDR battalions benefited from the greater range of training facilities available in Great Britain and it is planned to extend such training in 1978. There were two general call-ups for the UDR during the year and the turn-out on each occasion was at a gratifying high level of well over 90%. The actions of the UDR during the UUAC strike last May, in response to a general call-up, not only contributed materially to the maintenance of law and order during the strike but also enhanced the UDR's reputation for impartiality and effectiveness.

Further assistance to the civil power

228. During the year Army bomb disposal teams have continued to be available to assist local police forces in the event of bomb incidents in Great Britain. A joint force continues to be held at short notice to support the police in counter-terrorist operations at Heathrow Airport and, at the request of the Metropolitan Police, this force has taken part in seven exercises at Heathrow.

Fire-fighting

229. On 14 November 1977, personnel from all three Services were deployed to assist the fire authorities in maintaining fire cover throughout the United Kingdom during the firemen's strike. At the peak of the operation, some 20,000 servicemen were involved. The servicemen remained on duty until mid-January during which time they attended 39,612 incidents, and received considerable praise from the fire officers supervising them for their success in tackling an unfamiliar task. Inevitably, the commitment of so many man-hours to these duties caused considerable disruption to the normal programme of Service training, and imposed additional separation on many Service families. Protection of Offshore Installations

230. Ships and aircraft are deployed throughout the year for the protection of offshore oil and gas installations. They carry out air and sea surveillance and deterrent patrols and, together with other forces in the area, are available to react swiftly to any emergency. The security of offshore installations and the ability to provide assistance quickly are regularly tested in exercises conducted jointly by the Ministry of Defence and civil authorities. Five new Island class ships, ordered specifically for offshore protection tasks, are now in service together with four additional RAF Nimrod aircraft. These can be augmented whenever necessary by other ships and aircraft. The estimated costs of the protection of offshore oil and gas installations and other offshore tasks are shown in Table 5 of Annex A.

Fishery Protection

231. Since the extension of United Kingdom fishery limits on 1 January 1977 the enlarged Fishery Protection task has been performed with considerable success. In the twelve-mile belt, the Ton class minesweepers of the Coastal Division of the Fishery Protection Squadron carry out their traditional task assisted by fixed-wing aircraft and, as necessary, helicopters. Outside this belt the task is now undertaken by Island class vessels and RAF Nimrod surveillance patrols. The estimated costs of fishery protection and other offshore tasks are shown in Table 5 of Annex A.

Search and Rescue

232. During 1977 RN and RAF helicopters participated in 1303 search and rescue operations, many of which took place under extremely difficult and dangerous conditions. 917 lives were saved and four awards for Gallantry and one commendation for brave conduct were given to the officers and men concerned. The last of the RN Whirlwind helicopters were replaced by Wessex helicopters and plans are well advanced for the introduction of RAF Sea King helicopters for this task.

Other Military Aid to the Civil Community

Throughout 1977 all three Services carried out projects of varying size and complexity. The type of aid given included levelling a playing field in north Yorkshire, airlifting seriously ill patients, and delivering portable dialysis units by RAF helicopter.

HM THE QUEEN'S SILVER JUBILEE REVIEWS

All three Services participated in the national celebrations of Her Majesty The Queen's Silver Jubilee last year. Her Majesty reviewed the Fleet at Spithead from HMY Britannia and ships of the Royal Navy and Auxiliary Services in the Review lines were accompanied by vessels representing the British merchant and fishing fleets and other maritime organisations having close associations with the Royal Navy. Present too were ships from the navies of countries in the Commonwealth, NATO, the Central Treaty Organisation (CENTO) and the European Economic Community. The Review was concluded by a fly-past of helicopters of the Fleet Air Arm. The Review also provided the opportunity to conduct a major national maritime exercise with USN, RAN and RNZN forces to practise joint operating procedures. and tactics. In August Her Majesty inspected the Royal Marines on Plymouth Hoe.

235. The climax of the Army's celebrations, was the Silver Jubilee Review of the Army. Since the largest number of fighting units of the Army were stationed in Germany it was considered appropriate for Her Majesty to review the British Army of the Rhine. During the Review, which took place at Sennelager, Her Majesty was accompanied by the President of the Federal Republic of Germany, Herr Walter Scheel.

236. The centrepiece of Royal Air Force Silver Jubilee celebrations was the Review by Her Majesty at Finningley. Six Queen's Colours, 68 squadron standards and 838 Service personnel paraded on the occasion of the presentation of a new Queen's Colour for the Royal Air Force in the United Kingdom. 141 aircraft took part in a flying display representing the various roles and nearly every squadron in the Royal Air Force and a further 74 aircraft including several from Commonwealth air forces were on static display. 25 aircraft also took part in a specially augmented Queen's Birthday fly-past over Buckingham Palace.

237. In June Her Majesty reviewed the Reserve and Cadet Forces at the Services Military Musical Pageant at Wembley.

238. As part of the celebrations for the Silver Jubilee, Her Majesty, accompanied by His Royal Highness The Duke of Edinburgh, visited Northern Ireland in August. All security forces in the Province played their part in ensuring the success of this visit. REST OF THE WORLD DEPLOYMENTS AND OPERATIONS

Mediterranean

239. a. Cyprus. The Army garrison in the Sovereign Base Areas remains an infantry battalion, two infantry companies, an armoured reconnaissance squadron and a flight of Alouette helicopters, together with their logistic support units. The Army also contributes to the United Nations Force in Cyprus (UNFICYP) one infantry battalion less two companies, an armoured reconnaissance squadron, a flight of Alouette helicopters and logistic support. The Royal Air Force operates a squadron of Whirlwind helicopters in Cyprus of which four are in support of UNFICYP and the remainder in the search and rescue role. A squadron of the RAF Regiment is deployed to protect the airfield at Akrotiri.

b. Malta. A Royal Marine company group, some Army elements and minor administrative units will remain during the rundown and withdrawal period which will be completed by 31 March 1979. The naval facilities in Malta are also being reduced in preparation for the end of the Military Facilities Agreement. The Canberra and Nimrod squadrons based in Malta will have been withdrawn by the end of 1978 and RAF Luqa will close when the Agreement expires on 31 March 1979.

c. Gibraltar. A Royal Navy destroyer or frigate is stationed at Gibraltar and an infantry battalion forms the major part of the garrison. The Royal Air Force also operates the airfield there and a detachment of two Hunter aircraft.

Belize

240. Threatening statements by Guatemalan leaders and the call-up of their reservists led to an increase of tension between the United Kingdom and Guatemala and a further reinforcement of the Belize garrison in mid 1977. Army reinforcements consisted of an infantry battalion tactical headquarters plus two companies, minor administrative units and individual reinforcements to the force headquarters. RAF reinforcements included Harriers, a strengthening of the RAF Regiment detachment and an increase in the helicopter support force. Army and RAF reinforcements were flown in by the RAF air transport force. In addition, a Royal Navy frigate together with supporting Royal Fleet Auxiliaries was deployed to Belizean territorial waters.

Bermuda

241. A force of 80 men from Belize and 168 from the United Kingdom was flown to Bermuda in December 1977 in response to the Governor's request for military assistance. The rapid deployment of this force, transported by the Royal Air Force, helped to calm the disturbances and all the reinforcing troops were withdrawn before Christmas.

**Falkland Islands**

242. A Royal Marines detachment supported by the ice patrol ship HMS Endurance in the course of her survey work remains stationed in the Falkland Islands.

**Hong Kong**

243. The Hong Kong Squadron of five patrol craft makes occasional visits to neighbouring states. The garrison remains at four infantry battalions (including three Gurkha battalions), an engineer squadron, an Army Air Corps flight of Gazelle helicopters and a squadron of RAF Wessex helicopters. The Royal Air Force helicopters will vacate Kai Tak in March 1978 and will redeploy to Sek Kong in the New Territories.

**Brunei**

244. Consultations continue on the duration of our commitment of a Gurkha battalion to Brunei.

**Group Deployments**

245. Ships of the Royal Navy and supporting Royal Fleet Auxiliaries are deployed for exercises outside the NATO area from time to time. The helicopter-cruiser HMS Tiger, five frigates and four Royal Fleet Auxiliaries, accompanied initially by a nuclear-powered submarine, sailed from the United Kingdom in September 1977 for a deployment to the Far East lasting about seven months. On the outward passage ships of the group visited ports in the Mediterranean, the Black Sea and the Middle East taking part in the CENTO exercise MIDLINK. before crossing the Indian Ocean en route to Hong Kong, Singapore and Australia. The group returns to the United Kingdom in April 1978 making calls in Japan, South Korea, Philippines, India, Sri Lanka, Maldives and Malta on the way.

246. In May 1978 a group comprising the helicopter-cruiser HMS Blake, the nuclear-powered submarine HMS Conqueror, the Type 42 destroyer HMS Birmingham, four frigates and three Royal Fleet Auxiliaries, will leave the United Kingdom. This group will pass through the Panama Canal in July 1978 for a series of exercises and visits to ports on the west coast of North, Central and South America before returning home shortly before the end of the year.

SERVICE ASSISTANCE OVERSEAS

Disaster Relief

247. Following an earthquake in the Solomon Islands in April 1977, a team of six men from the Queen's Gurkha Engineers in Hong Kong was sent to help survey the damage caused and to assist in reconstruction. After the cyclone in southern India in November 1977, RAF aircraft flew relief supplies to the disaster area. The RAF search and rescue detachments in Cyprus and Hong Kong have also taken part in civil rescues and the Cyprus detachment was heavily engaged on 12 November in the rescue of 117 persons from the Turkish ferry ERTURK I. RAF aircraft have also flown out emergency electricity generating equipment to the Gambia. Hydrography

248. Major surveys are being carried out in Iranian waters on repayment from the Iranian Government. The task covers a period of some three years, and is currently employing three ships of the Hydrographic Survey Fleet. A survey of Marsaxlokk Bay has been completed for the Maltese Government, and further coastal surveys are taking place in Ghana under the hydrographic assistance programme funded by the Ministry of Overseas Development.

Diving

249. In May 1977 a RN diving team working in co-operation with Egyptian naval divers recovered the Gate of Diocletian from the area flooded by the Aswan High Dam. Further diving to recover the ruins of the Temple of Augustus Caesar began in October 1977 and is expected to finish in April 1978. Another RN diving team assisted by Army and RAF bomb disposal experts has completed an assignment to clear unexploded wartime ordnance in the Gilbert Islands and Tuvalu in the western Pacific.

Oman

250. With the exception of a small training team all direct assistance units were withdrawn from Oman during 1977. Prior to departure a Royal Engineer troop completed the road linking Dhofar to Dalquat, which was opened in December 1977. The number of loan service personnel in the Sultan of Oman's Forces is gradually being reduced as Omanis become available to occupy their positions. EXERCISES

251. The total number of exercises outside the NATO area in which the Services participated during 1977 decreased. While on passage RN groups have conducted exercises with naval forces of the United States, the Netherlands, Italy, Portugal, France, Australia and Brazil, and Royal Marine ship detachments have continued to train and exercise in various parts of the world. Army units have trained in Australia, New Zealand, Fiji, Brunei, Cyprus, Kenya, the Gambia, Sudan, the Caribbean and the United States, practising tactics and live-firing in challenging and unfamiliar terrain, and techniques of sea and air movement. The second annual four-month individual exchange of Army personnel took place between the United Kingdom, Australia and New Zealand. RAF aircraft from Malta joined the ships of the group deployment en route to the Far East to take part in the CENTO maritime exercise MIDLINK off the coast of Iran. RAF aircraft also took part in other CENTO exercises in Iran and a RAF mountain rescue team participated in the annual CENTO search and rescue exercise NEJAT also held in Iran. In October last year a Strike Command Nimrod won the Fincastle anti-submarine warfare trophy in competition with aircraft from Australia, Canada and New Zealand. Expenditure on equipment accounts for approximately 40% of the defence budget, and is expected to amount to £2770 million in 1978/79. By comparison (at the same price level) the expenditure forecast for 1977/78 was £2523 million. Including associated personnel and other costs, total procurement expenditure for 1978/79 is estimated at £3060 million, split up as follows:

**FIGURE 7**

| Category | Amount (£ million) | |---------------------------------|--------------------| | Production | £2184 (71%) | | Research and Development | £876 (29%) | | Production of New Equipment | £1044 (44%) | | Development of Approved Systems | £500 (25%) | | Research | £100 (4%) | | Production of Spares etc | £530 (27%) |

- Including R & D support costs e.g. headquarters expenses

302. The £2184 million to be spent on production of new equipment and spares can roughly be subdivided into: 31% on ships, ship equipment and weapons; 26% on Army equipment and vehicles; 34% on aircraft, aircraft engines, aircraft equipment and weapons; and 9% on general support. Of the £2184 million, over £1900 million will be spent with British industry and the Royal Ordnance Factories.

303. Total R & D expenditure at £876 million represents 13% of the overall defence budget and compares (at the same price level) with forecast expenditure of £869 million in 1977/78. £608 million of the R & D figure will be spent extramurally.

INDUSTRIAL AND EMPLOYMENT IMPLICATIONS OF THE EQUIPMENT PROGRAMME

304. In 1976/77, the Ministry of Defence spent £2138 million on defence equipment. Of this about 70% was spent on national contracts placed with British industry, about 20% as our share of collaborative projects and about 10% on contracts placed overseas. Of the payments made directly by the Ministry of Defence to contractors in the United Kingdom the bulk, about £1,600 million, went to the 38 firms (including the Royal Ordnance Factories), listed at Annex H as each receiving more than £5 million.

305. The defence equipment programme generates directly the equivalent of about 200,000 full-time job opportunities, and overseas sales generate about 70,000 more, in the defence industries. Roughly the same numbers again are generated in industry generally in support of the manufacture of defence equipment.

306. The defence equipment programme is therefore large enough in itself to be of considerable economic and industrial significance. The nature of the programme tends to concentrate the expenditure in particular industries. For instance we estimate that about half of those employed in the aerospace industry are engaged on military work including work for export, and shipbuilding accounts for up to a third of those employed in the shipbuilding industry. Defence work will continue to be a major factor in sustaining the levels of employment and technological expertise in British Aerospace, British Shipbuilding and other important associated sectors of industry, notably electronics.

307. Given these substantial effects, the Ministry of Defence recognises the need to take the industrial implications of equipment programmes into account in making procurement decisions, though the primary objective of defence procurement must be to ensure that the equipment needs of the Services are met in the most timely and cost-effective manner.

INTERNATIONAL COLLABORATION

308. The growing complexity and cost of each new generation of weapon systems makes increasingly heavy demands on R & D capacity and budgets throughout the Alliance. No European NATO country can in these circumstances afford to develop from its own resources all its armed forces' requirements. New systems must be built to operate in conjunction with others in NATO, and in some cases it is desirable for them to be standardised. In addition, unit costs are very high if the production is limited to our national requirement. There is thus a continuing need to see how far our own Services' requirements can be met through co-operative procurement arrangements with our Allies, for example, by collaboration in individual projects, which will enable us to maintain the essential range of R & D capabilities and to share in the development of more equipments than we could achieve from national projects alone.

309. International co-operation in this complex field raises difficult problems. Operational requirements and time scales both need to be agreed; the industrial arrangements need to be satisfactory for each participating country; balance-of-trade considerations arising from reciprocal sales and purchases must be taken into account; and the need in the long term to maintain adequate R & D capabilities has to be borne in mind.

310. The United Kingdom is taking a leading part in the efforts to overcome the problems and make co-operation more effective, particularly in Europe. We are active members of the independent EFC which is concentrating on a number of important projects, especially in the aircraft and missile fields. These offer opportunities for collaboration in the development stage of major projects, co-operation in production, manufacture under licence and direct sales and purchases. At the North Atlantic Summit meeting in London in May 1977 President Carter welcomed the initiatives taken by the EPG in Europe, and undertook that the United States would seek increased opportunities to buy European defence equipment. For its part, the EPG has proposed to the United States and Canada that they should jointly examine a number of means to improve the imbalance in trade between Europe and North America in the defence equipment sector, and as a result technical discussions between the EPG and the United States and Canada are under way.

PRODUCTION AND DEVELOPMENT ROYAL NAVY

311. Ships

a. Nuclear-Powered Fleet Submarines. These vessels are designed for hunter/killer operations against surface ships and submarines. HMS Sceptre, the tenth nuclear-powered fleet submarine and the fourth of the Swiftsure class, is planned to enter service shortly and two more of the class are under construction. The order for HMS Trafalgar, the first vessel of a new class of nuclear-powered fleet submarines, was placed last year and a second is planned for the coming year. These submarines will have improvements in equipment, endurance and speed which will enable them to be more effective. in their primary role of hunting and detecting enemy submarines and surface ships in support of NATO operations.

b. Anti-Submarine Cruisers. HMS Invincible, the first of the anti-submarine cruisers was launched in May 1977 and construction work on the second, HMS Illustrious, continues. A third ship of this class is planned.

c. Destroyers. Two Type 42 guided-missile destroyers are now in service and a third, HMS Newcastle, will shortly be accepted into service. Three more are due to enter service in the coming year. Four more ships were on order at the beginning of this year and further orders are planned.

d. Frigates. Seven Type 21 frigates are now in service and the last of the class is expected to enter service shortly. With the launching of HMS Battleaxe in 1977, two Type 22 frigates are now fitting out and two more are under construction. A fifth Type 22 is planned to be ordered this year.

e. Mine Countermeasures Vessels. HMS Ledbury, the second vessel of the Hunt Class of Mine Countermeasures Vessels, is under construction and further orders are planned for this year.

f. Patrol Vessels. Five ships of the Island class have now entered service as offshore patrol vessels. Two further ships of this class have been ordered for a variety of tasks including coastal fishery protection.

F. Fleet Replenishment Ships. RFA Fort Grange will enter service this year and a further vessel is under construction.

h. Refits. The modernisation of HMS Dido, the last of the first batch of eight ships in the Leander class frigate refit programme, is expected to be completed later this year. Modernisation of three ships in the second batch is complete, with four more in progress. Work has also begun on the refit of HMS Andromeda, the first ship in the third batch, which will include the fitting of the Sea Wolf point-defence missile system, Exocet anti-ship missiles, enhanced sonar equipments and electronic warfare equipment.

312. Naval Aviation

a. Sea Harrier. The first front-line Sea Harrier squadron is planned to form in 1980 for embarkation initially in HMS Hermes. The second will embark in HMS Invincible, and ultimately all squadrons will be deployed in ships of her class. The aircraft will be armed with Sidewinder AIM-9L air-to-air and P3T air-to-surface missiles to provide it with a quick-reaction capability. against enemy aircraft and an attack capability against surface vessels.

b. Naval Helicopters. Sea King Mark 1 helicopters are being modified to the standards of Mark 2 helicopters, currently in production. Sea Kings will also be fitted with an improved radar and communications system and an acoustic processor and sonobuoys to supplement the existing dunking sonar. The other helicopter under production for the Royal Navy is the Lynx Mark 2, which will be operated from most destroyers and frigates.

Naval Weapons

313. Air-Defence Weapons

a. Sea Dart. This medium-range surface-to-air guided weapon system is now fitted in three ships, and is expected to be accepted into operational service this year. A programme is under way for an improved Sea Dart system and supporting radars to increase its air-defence capabilities to meet the expected threat in the mid to late 1980's.

b. Sea Wolf. The intensive series of sea trials on board HMS Penelope proved highly successful and production of both missile and ship system has begun. The weapon system is in advance of all others of its type and will provide the Type 22 frigate and other ships with a close-range self-defence capability against missiles and aircraft. A programme of improvements is in hand to maintain the capability of Sea Wolf in the face of expected developments in the threat.

314. **Anti-Surface Ship Weapons**

a. **Sub-Harpoon.** Negotiations were completed with the United States Government last October for the full development of Sub-Harpoon, a submarine-launched, air flight long-range anti-ship missile which will provide the main anti-surface ship armament of our submarine fleet from the early 1980s.

b. **Sea Skua.** This anti-ship missile is expected to enter service in the early 1980's. Carried by the Lynx helicopter, it is intended to provide destroyers and frigates with an attack capability stretching far beyond their horizon.

c. **NATO Anti-Surface Ship Missile.** Joint feasibility studies are now in hand with a number of NATO Allies for the next generation of anti-ship missiles for service in the late 1980s and 1990s.

315. **Anti-Submarine Weapons**

a. **Heavyweight Torpedoes.** Feasibility studies for a successor to the submarine-launched Tigerfish torpedo have begun. b. **Lightweight Torpedoes.** Development is continuing on Sting Ray, the advanced light-weight torpedo. It is designed to succeed the American Mk 46 torpedo and will be capable of being launched from surface ships, helicopters and RAF Nimrod aircraft.

316. **Other Naval Equipment**

a. **Propulsion units.** A new marine propulsion unit based on the latest version of the Rolls Royce Spey aero-engine has entered full development.

b. **Sonars.** Several types of new sonar equipment are being developed and fitted to provide surface ships, submarines and helicopters with improved anti-submarine detection and classification capabilities.

c. **Electronic Warfare and Communications Equipment.** Advanced new electronic warfare and communications equipments are included in national and collaborative development and production programmes. A NATO collaborative development programme is in hand for a decoy system for use against anti-surface ship missiles.

d. **Navigation Equipment.** Production orders have been placed for an improved inertial navigational system which will be fitted in submarines and the new anti-submarine cruiser. Ship Radars. An advanced air surveillance and target indication radar is being developed and will be in service with the surface fleet by the mid-1980s.

Airborne Radars. The Seespray airborne search radar is now in full production. This is being fitted in the Lynx helicopter and will provide target information for Sea Skua missiles. Blue Fox, a derivative of Seespray, is under development and will be fitted in the Sea Harrier for air-to-air and air-to-surface roles.

Action Information Systems. The large majority of the surface fleet will be fitted with computer-based action information systems together with digital data links by the mid-1980s.

Army

Armoured Forces

Chieftain. Work on the planned improvements to maintain and enhance the effectiveness of Chieftain into the 1980s is going ahead. In addition to latest marks of the tank laser sight, units will also this year begin to receive the muzzle reference system. A number of modifications to improve the reliability of the main engine are being incorporated into the fleet. b. **Chieftain Replacement (MBT 80).** The Anglo-German collaborative studies on a future main battle tank were terminated in March last year. Although there was a large measure of agreement on the details of the requirement, both countries felt that collaborative development and production would not be possible, mainly because the timescales in which each country required the replacement tank became incompatible during the course of the joint work. National studies on the best way of meeting our requirement for a tank to be in service by the late 1980s are now in progress, and these will make use of the valuable work carried out during the joint concept studies.

c. **Mechanised Infantry Combat Vehicle.** The second phase of project definition for a mechanised infantry combat vehicle, to replace part of the present FV430 series of armoured personnel carriers in the 1980s, began in August last year. Project definition has also begun on a series of variants.

d. **Tracked Combat Reconnaissance Vehicles.** Two more variants in the series are now entering service - Striker, which carries the Swingfire anti-tank guided weapon system, and the command vehicle, Sultan. The last variants in the series, Samaritan, en armoured ambulance, and Samson, a recovery vehicle, are planned to enter the production phase this year.

e. Combat Engineer Tractor. The new combat engineer tractor will enter service this year.

318. Artillery and Associated Equipment

a. FH 70 and SP 70. The towed 155mm field howitzer, FH 70, will begin to enter service early next year.

The three collaborating countries, the United Kingdom, the Federal Republic of Germany and Italy, are also continuing development work on the self-propelled version, SP 70. Prototypes have been produced and are now undergoing technical evaluation trials.

b. Supervisor. Development of Supervisor, a battlefield surveillance and target acquisition system using real-time data transmission, is continuing. Supervisor is based on an unmanned miniature helicopter, the prototype of which will make its first flight in the spring of this year.

c. Cervantes. Development of a trailer-mounted radar, to locate rocket launchers and mortars, is continuing.

319. Army Guided Weapons

320. Rapier Air-Defence Missile System. Deployment of the all-weather blindfire tracking radar, DN 181, will begin early this year. Studies are now being carried out on further improvements to Rapier and to evaluate the cost-effectiveness of a tracked version.

b. Helicopter-borne Anti-Tank Guided Weapon. Following the evaluation of the Franco-German HOT and the American TOW systems, the Ministry of Defence announced in August last year that TOW is to be adopted and will enter service with the Army Lynx helicopter in the early 1980s. A substantial part of the equipment will be manufactured under licence in the United Kingdom.

c. Swingfire Long-Range Anti-Tank Guided Weapon. Development is continuing of a thermal-imaging night sight for Swingfire. Discussions have also begun with France and the Federal Republic of Germany on the requirement for a third-generation long-range anti-tank guided weapon.

d. Milan Medium-Range Anti-Tank Guided Weapon. It has been possible to accelerate delivery of the initial batch of Milan equipments being bought from the Franco-German consortium, Euromissile. Deliveries of this batch began last year and will be spread over two years. Development of a thermal-imaging night sight for Milan has begun on a collaborative tripartite basis between the United Kingdom, the Federal Republic of Germany and France. Other Army Equipment

a. Light Anti-Armour Weapon. Project definition began last year on a man-portable anti-armour weapon to replace the 84mm Carl Gustav recoil-less rifle and 66mm M72 rocket. Discussions are taking place within the EPG on the possibilities of collaboration.

b. Small Arms. NATO technical trials to select a standard calibre for future small arms began last year, and military tests will begin later this year. The new British 4.85mm weapon system, comprising an automatic rifle and light support weapon, has been entered in the trials and the results should be available by the end of next year.

c. Mines. The Barmine anti-tank mine is now in service and work began last year to develop additional fuses to extend its operational application and improve its resistance to countermeasures. The complementary off-route mine and the Ranger scatterable anti-personnel mine system will enter service later this year.

d. Electronic Warfare. In July last year, an electronic-warfare regiment took its place in the order of battle of 1 (BR) Corps. Most of its equipment will be British, although some is being bought from France. Further improvements in our electronic warfare capability are under consideration. e. **Lynx Helicopter.** Intensive flying trials of the Army version of Lynx have been completed, and the helicopter is expected to enter service in the middle of this year, replacing the Scout.

f. **Vehicles.** The introduction of a range of low-mobility vehicles – a basic cargo carrier, with tipper, fuel tanker and recovery variants – is proceeding according to plan. A main contractor has been chosen by competitive tender for the production of an 8-tonne medium-mobility load carrier which, together with its variants, will form the backbone of the Army's future logistic fleet.

g. **Communications.** The Ptarmigan tactical trunk communications system, which will replace the present Bruin system, has now entered the final stages of development. Ptarmigan has been designed to conform with standards agreed in the communications sub-group of the Eurogroup, to enable future trunk systems to be fully interoperable.

h. **Automatic Data Processing (ADP) System.** Trials will be carried out in BAOR of a new command and control ADP system, Wavell. If these trials are successful it is planned eventually to equip all formation headquarters in 1 (BR) Corps with Wavell to assist them in data-handling. i. Logistic Landing craft. Two newly-built logistic landing craft have been launched. HMAV Ardennes was commissioned in December last year and HMAV Arakan will be commissioned in August this year. These vessels will provide peacetime logistic support to the Hebrides and logistic support for the reinforcement of Europe in war.

ROYAL AIR FORCE

321. New Aircraft

a. Tornado GR1. First deliveries of production aircraft, of which 150 have so far been ordered, are expected next year. The variable geometry configuration will confer great operational flexibility and permit a combination of high-speed low-level flight, good range and an excellent take-off and landing performance. The tri-national flight test programme had amassed some 1,500 hours by the end of 1977, and test data indicate that Service requirements will be met.

b. Tornado F2. The Tornado F2 air-defence variant is now in full development with the first of three development aircraft under construction. It will have an excellent loiter capability and its armament will include Sky Flash medium-range and AIM9L short- range air-to-air missiles, and cannon. The first phase of the airborne trials of an important new air-intercept radar for the Tornado F2 has been completed and the second phase, to demonstrate full mission capability, will being shortly.

c. Nimrod AEW. Full development is under way to convert eleven Nimrod aircraft to the AEW role. They will enter service progressively in the early 1980s, replacing the Shackleton. Mission system avionics will be developed and integrated into a modified Nimrod airframe. The main features of the system will be a new radar, electronic support measures, "identification friend or foe" interrogators, an integrated data-handling system and associated communications equipment. The aircraft is planned to be interoperable to the maximum extent possible with other NATO airborne early warning systems.

d. The Harrier/Jaguar successor. Studies of various designs for an aircraft to replace the Harrier and Jaguar are continuing with the aim of combining a capability for battlefield attack and for air combat in one airframe. The possibility of developing such an aircraft collaboratively is being explored with a number of potential partners in the EPG. Support Helicopters. It is intended to meet the Army's requirement for medium-lift helicopter support by the purchase of Boeing-Vertol CH-147 Chinook helicopters from the United States. The helicopters would be equipped with British equipment, where appropriate, to ensure commonality with equipment already in service with the Royal Air Force. At the same time a number of Wessex helicopters would be withdrawn from the front-line and transferred to other roles, or placed in reserve.

Sea King Search and Rescue Helicopters. The first of the Sea King search and rescue helicopters have been delivered to the Royal Air Force. They will enter service during the year and the Whirlwinds they replace will be withdrawn.

Aircraft in Service

Nimrod Maritime Reconnaissance (MR) Aircraft. The major refit of Nimrod long-range maritime patrol aircraft is now in hand and flight trials of the acoustic processor start this year. The first refitted Nimrod MR2s with the processor, the associated active attack and long-range passive sonobuoys, and the Searchwater radar are due to enter service next year. The refit is to be completed by the mid-1980's. Harrier. An order for a further 24 aircraft has been placed and deliveries should start next year. The feasibility of fitting a new improved wing to the aircraft is also under study.

Jaguar. Work is in hand to increase the take-off thrust and the time between overhauls of the Adour Mk 102 engine. Reconnaissance pods containing British infra-red linescan and camera equipment are now being fitted.

Puma. The fleet will be progressively up-dated by modifications to improve performance and extend component life, and by the introduction of fibre-composite main rotor blades and an ice and snow protection system. Delivery of an advanced tactical navigation system is planned to take place this year.

Phantom. Work has begun on a programme to improve the combat capability of the Phantom to maintain a high level of operational effectiveness until it is replaced by the Tornado F2 in the mid 1980's.

Aircraft Weapons

Air-to-Air Missiles. The Sky Flash medium-range air-to-air missile, to be carried by the Phantom and the Tornado F2, is now entering full production. Requirements for future short-range air-to-air missiles for the Phantom and Tornado F2 will be met by the procurement of AIM9L missiles most of which, subject to satisfactory negotiation, will be manufactured by a European consortium of which the United Kingdom will be a member.

b. Air-to-Surface Weapons. Project definition has begun of the British Aerospace P3T anti-ship sea-skimming missile, which will be fitted to the Buccaneer in the early 1980s to replace TV Martel and will later be carried by those Tornado GR1s which operate in the maritime strike/attack role. P3T will have a considerably longer range than Martel, will be guided by active radar to provide an all-weather day and night capability and will be able to penetrate the enemy's electronic countermeasures (ECM) defences. During the year American laser-guidance kits to improve the accuracy of RAF 1,000 lb high-explosive bombs and laser-designator pods for use on Buccaneers will be delivered. Agreement in principle has been reached with the United States for the co-operative development of an advanced airfield attack system. Other weapons projects include studies of anti-armour and defence-suppression weapons, planned to enter service in the 1980s. 324. **Ground-Based Air-Defence Equipment**

a. **Rapier.** The Rapier systems now in service with the RAF Regiment are being fitted with the Blindfire tracking radar, DN 181. A study of further improvements is under way (see para 319a).

b. **The United Kingdom Air-Defence Ground Environment (UKADGE).** The planned programme of improvements to UKADGE, which is receiving NATO funding support, is now well advanced and development work will begin this year. Work is also in hand to re-equip a number of early warning stations.

325. **Other Electronics**

a. **"Identification Friend or Foe" (IFF).** Feasibility studies are in progress in order to define a replacement IFF system with NATO-wide application.

b. **Communications.** High-speed data communications are planned for the transfer of information required by future command and control systems. Project definition has begun on the exchange of digital data between fighters, AEW aircraft, ships and UKADGE, and the feasibility of introducing a general purpose ground communication system, using digital transmission and computer switching techniques, is being investigated. New very-high frequency (VHF) and ultra-high frequency (UHF) airborne radio systems are being installed in most RAF aircraft to replace obsolescent equipment and to satisfy revised international compatibility standards; new VHF and UHF ground radios are also being introduced. Techniques to improve beyond-line-of-sight radio systems are being studied and the installation of a new HF radio ground/air network for Strike Command aircraft has begun. The United Kingdom is cooperating closely with its Allies to ensure that, where necessary, future communications systems are interoperable.

2. Electronic Warfare. Passive radar warning equipment is being fitted in a variety of combat aircraft and active ECM equipment is planned to be fitted in the Tornado GR1 and the Jaguar GR1. ECM for the Harrier are also being studied.

3. Other Development Programmes

Work is continuing on improving engine safety, efficiency and reliability and on reducing costs. In order to build up experience on advanced technologies relevant to new aircraft and weapons, demonstrator programmes are being carried out on the use of composite materials for helicopters; on the application of Active Control technology to enable the pilot to get maximum capability from the aircraft and allow greater freedom to the designer; and on advanced air-to-air missiles. 327. The defence research programme is carried out both in R & D establishments and under outside contracts. It covers a wide range of activities extending from the generation and assessment of new ideas to experimental work and exploratory development undertaken to the point where an operational staff target is formulated against which feasibility studies and full-scale development of specific projects can be initiated. One of the main objectives of defence research, accounting for about two-thirds of the expenditure, is the removal of major scientific and technical uncertainties before heavy expenditure is committed to development. The remaining one-third of the expenditure is concerned with maintaining an adequate scientific and technological base to meet future military needs. In 1978/79 research is expected to cost £129 million.

328. The Ministry of Defence also manages programmes of research and technology on behalf of the Department of Industry and the Civil Aviation Authority. In many cases these are run as separate civil programmes; in others, joint programmes aimed at military and civil objectives are possible. The total effort involved continues to reduce. In each case an appropriate share of the costs is met by the civil authority concerned. In addition, some of the facilities and capabilities required in establishments for defence purposes also serve the civil research needs of public and industrial concerns, and work on repayment is carried out on their behalf. Total receipts from both sources are estimated to be £24 million in 1978/79. With the creation of British Aerospace in 1977, some re-arrangement of responsibilities, especially on non-defence work, will be required and the implications, including those for defence R & D establishments, are being examined.

329. As a result of the Management Review the headquarters of the Controller R & D Establishments and Research (CER) are being reorganised. The main feature is the delegation to R & D establishments of responsibilities for the detailed formulation, management and co-ordination of extramural and intramural research programmes, with overall policy and control exercised by the reduced and reorganised headquarters under CER.

330. Following the announcement in the 1977 Statement on the Defence Estimates that a separate defence establishment was not required on microbiological research, the Central Policy Review Staff and the Medical Research Council have carried out studies of the civil requirements for the Microbiological Research Establishment (MRE) at Porton. The Government is considering the future of MRE as a civil establishment in the light of the studies. Any proposals will be the subject of consultations with the Staff Associations and Trade Unions concerned.

ROYAL ORDNANCE FACTORIES

331. The Royal Ordnance Factories organisation is now in its fourth year of operation under a trading fund. This method of financing, together with extensions to the delegated powers granted at the introduction, provides the means for it to continue to improve motivation and efficiency and extend the scope of its operations. The organisation continues to meet its financial objective and to make some provision for reserves. Besides meeting the needs of the Services over a wide range of defence equipment, it is broadening the base of its overseas business both in number of overseas customers and its range of defence equipment.

332. During 1978/79 its cash receipts are expected to rise to some £370 million, of which well over half will be from exports. Equipment manufactured during the year will include armoured fighting vehicles, both heavy and light, and including main battle tanks; the 105 mm light gun; the combat engineer tractor; small arms; a wide variety of ammunition; fuses; explosives and propellants; components for use by British industry; and spares of all kinds. The scope of design and development work also continues to widen in close collaboration with the Ministry's R & D establishments and with British industry, and international collaboration in the design, development and production of equipment continues to be fostered.

333. An increased capital investment programme is to be undertaken in order to maintain the standard of plant and buildings required; to introduce new techniques and processes; and to meet requirements for new equipment. The future computer requirements of the organisation are also under review, and steps are being taken to introduce appropriate changes in accounting practice in preparation for the expected adoption of current cost accounting.

334. The size of the overall manufacturing programme is expected to require a slightly increased work force in 1978/79. Training will continue to be given strong emphasis, particularly courses relating to management and safety. The number of apprentices under training is again expected to increase, to meet the requirement for skilled men. DEFENCE SALES

335. Overseas sales of defence equipment and associated services cover a wide range of items produced by British industry and by the Royal Ordnance Factories, with the Defence Sales Organisation providing support, assistance and advice. These sales continue to make a substantial contribution to the country's balance of payments. Equipment sales will probably amount to at least £900 million in 1978/79. MANPOWER

RECRUITMENT, RE-ENGAGEMENT AND WASTAGE, AND REDUNDANCY

401. Recruitment of men and women to all three Services has remained generally satisfactory and, with the exception of several key RAF officer branches and certain other specialist areas, requirements have been met. In the twelve months to 31 March 1978 a total of 39,600 officers, servicemen and servicewomen are expected to be recruited compared with 40,244 recruited during the previous year. Further details of recruitment for the first nine months of 1977/78 and for the same period in the previous year are given in Annex G Table 5.

Recruitment of Officers

402. The number of Royal Navy officers entering from civilian life has been generally satisfactory but there are still shortages among engineer officers and medical officers. The Royal Marines have, once again, recruited the required numbers.

403. Recruitment of Army officers has continued to improve. Many applicants are of high quality and this has been reflected in the award of 43 undergraduate cadetships and 105 bursaries in the last nine months of 1977. A new company, the Rowallan Company, has been formed at the Royal Military Academy Sandhurst to provide additional leadership training, prior to formal entry into the Academy, for those officer applicants for whom the Regular Commissions Board considers it desirable. Recruitment of qualified doctors remains below target but the entry of medical cadets continues to be encouraging.

404. There has been a shortage of candidates of adequate quality to meet the recruiting requirements for the Royal Air Force. It has not proved possible to recruit the numbers required for the General Duties (Pilot, Navigator, Aircraft Control and Fighter Control), Engineer, Security (RAF Regiment) and Administrative (Education) Branches, in some cases by a substantial margin. The University Cadetship Scheme has attracted only half the expected number of recruits to the General Duties, Engineer and Administrative Branches.

Recruitment of Servicemen

405. The recruiting requirements for most branches in the Royal Navy will be met but there will be a shortfall of artificers, an area in which certain categories are already below establishment. The application rate for Royal Marines other ranks remains buoyant and targets should be achieved.

406. Due to the rundown of the Army, the recruitment targets for soldiers for 1977/78 are lower than in previous years and the prospects for meeting them are good. The recruitment targets for 1978/79 and future years will be higher to prevent a manpower deficit in the early 1980's.

407. The 1977/78 airmen target is very similar to the previous year's and there have been no serious recruiting problems, except in some support trades. Re-engagement

408. Re-engagement rates in all three Services remain satisfactory.

Wastage

409. There has been a significant increase in the number of trained officers who have applied for premature voluntary release from the Army in the first six months of 1977/78 and the rate of exit for soldiers has also been high. The Royal Air Force is experiencing an equally substantial rise in applications from trained officers and men, particularly those with considerable skill and experience. No such increase has been evident in the Royal Navy.

Redundancy

410. In the Royal Navy the limited programme of officer redundancy, involving a total of 50 Commanders, will have been completed by 1 April 1979. The Army's redundancy programme will be completed in 1979/80; by 31 December 1977 some 820 officers and 3,500 soldiers had been selected for redundancy, all except 7 officers and 134 soldiers being volunteers. Redundancy in the Royal Air Force is nearly complete and in the three years up to March 1978 728 officers and 1,695 airmen will have left the Royal Air Force. The scheme has been predominantly voluntary though 271 officers were made redundant compulsorily.

WOMEN'S SERVICES

411. Members of Queen Alexandra's Royal Naval Nursing Service and the Women's Royal Naval Service (WRNS) became subject to the Naval Discipline Act on 1 July 1977. The Ministry of Defence is also continuing the policy of providing wider employment for WRNS personnel and some 400 RN shore appointments originally complemented for RN officers but which could be filled by WRNS officers on an opportunity basis have been identified. So far 43 WRNS officers are filling, or have been nominated for, this type of appointment, and members of the WRNS will thus be employed in more of the senior posts in areas of Management, Intelligence, Communications, Operational support, and Staff duties. In the case of WRNS ratings, alterations to the training, role and structure of the WRNS Regulating category have been made to align it with the RN Regulating branch so that a greater degree of integration in employment can be achieved. A WRNS Physical Training and Recreation category has been set up and will open in 1978. A study continues into the opportunities for broadening the scope of employment of the Women's Royal Army Corps in the Army. Members of the Women's Royal Air Force (WRAF) are employed throughout the Royal Air Force at all levels up to Air Rank. In May 1977 the Director of the WRAF was elected chairman of the Committee on Women in NATO Forces for a two-year term.

RESERVES AND CADET FORCES

412. The new arrangements since the lapse of the post of Admiral Commanding Royal Naval Reserves are working well. The strength of the Volunteer Naval Reserves on 31 October 1977 was officers and ratings. The strength of the Royal Marines Reserve was officers and men. The TAVR had another very successful national publicity campaign in the spring of 1977. The particular needs of Scotland and Northern Ireland were recognised by mounting publicity campaigns there in the autumn. The strength of the TAVR on 31 December 1977 was including women, compared with a total strength of 60,104 on 31 December 1976. The Royal Air Force Regular and Volunteer Reserves strength was 3902 on 31 December 1977. The University Officer Training Corps have again proved valuable. During the past year they have increased in size and have produced 76 officers for the Regular Army and 162 for the TAVR.

**Cadet Forces**

The Cadet Forces continue to play an important role in developing amongst young people between the ages of 12 and 20 the personal qualities of self-discipline and leadership and to encourage an interest in the Armed Forces. Since 1 January 1978 the Sea Cadet Corps has been reorganised into six areas more closely aligned to the Royal Navy's geographical areas in the United Kingdom, permitting each of the area Flag Officers to take a more direct interest in the Corps. The size of the Army Cadet Training Teams is to be increased to enable them to organise adventure training for the Cadet Forces. This will enable the Army Cadet Training Teams to take over one of the tasks previously carried out by the Army Youth Teams which are to be disbanded by April 1978 in the interests of economy in manpower and expenditure. The Venture Mk 2 self-launching glider has now been introduced into service to augment the gliding facilities for Air Cadets. This useful and popular activity continues to play an important part in attracting recruits for the Royal Air Force.

PAY AND OTHER CONDITIONS OF SERVICE

Pay and Pensions

414. In their Sixth Report (1977), the Review Body on Armed Forces Pay recommended the payment of a supplement of 5% of total earnings, subject to a cash minimum of £2.50 and an upper cash maximum of £4 a week, to all members of the Armed Forces within their terms of reference. Proportionate rates of supplement were recommended for junior servicemen and women. The Review Body also recommended increases in charges for food and accommodation. These recommendations, which complied with the Government's guidance on incomes set out in the White Paper "The Attack on Inflation - The Second Year" (Cmnd 6507), were implemented with effect from 1 April 1977.

415. The Armed Forces Pension Scheme provides members of the three Services with retirement pensions and terminal grants together with a range of death, injury and other benefits which take account of the special circumstances of a Service career. A number of improvements to the Scheme have been introduced in recent years. In accordance with Government policy for public sector schemes it is intended that members of the Scheme should be contracted out of the additional pension element of the new earnings related State scheme which comes into operation on 6 April 1978 and application has been made to the Occupational Pensions Board for a contracting-out certificate in accordance with the provisions of the Social Security Pensions Act 1975.

Contracting out will have no effect on current benefits but will permit reduced National Insurance contributions and an extension in the provision of preserved pensions for early leavers. Preparations are in hand to enable accrued pension rights to be transferred both into and out of the Scheme.

Family Welfare

416. The Naval Personal and Family Service was formally inaugurated on 1 April 1977. This brings together, under the overall control of the Commander-in-Chief Naval Home Command, the existing Naval welfare and community services and related aspects of housing. In each Area a senior officer in the Command structure will be responsible for ensuring the co-ordination of these services. Sailors and Families Advice Bureaux manned by senior ratings have been opened in all the main Naval ports. The bureaux provide a quick and easy information service for Naval personnel and their families on a wide range of welfare matters and are proving popular and most successful.

Service Voting

417. The new arrangements for the registration of Service personnel and their spouses, contained in the Representation of the People (Armed Forces) Act 1976, are reflected in the Register of Electors coming into force on 16 February 1978. All Service personnel and their spouses are now able to register as Service voters on a once-and-for-all basis and remain on the register for as long as they remain in the Services.

Television in Germany

418. More than 20,000 members of the Services and their families stationed in Germany are now able to receive recorded transmissions of British television programmes and this number will be further increased during 1978.

DEFENCE STUDIES, EDUCATION AND TRAINING

Defence Studies and Education

419. The close relationship between the Ministry of Defence and the universities in the field of higher defence studies stimulates analysis and discussion of defence matters. In 1977 two major seminars were held under Ministry of Defence sponsorship, one on Soviet Military Power, Capabilities and Purposes organised by Southampton University and the other on The Southern Flank arranged by Oxford University.

420. The National Defence College course at Latimer has been reduced in length and the first new style course began in January 1978.

421. The Royal Navy has 166 university cadets and 64 other full career officers studying for degrees at civilian universities. In addition, there are 168 officers reading for a first degree in engineering at the Royal Naval Engineering College Manadon. 135 serving Army officers, six undergraduate cadets and three holders of undergraduate bursaries are reading for degrees in engineering and applied science at the Royal Military College of Science. The Army also has 89 regular officers and 160 undergraduate cadets studying at university, together with 153 students who have entered under the undergraduate bursary scheme. There are also 226 RAF university cadets pursuing degree courses while 28 other serving officers are attending postgraduate courses at university.

422. The Staff College, Camberley has introduced an annual two week course intended to provide selected TAVR officers with a basic knowledge of staff duties and responsibilities.

423. The study of initial RAF officer training mentioned in the 1977 Statement on the Defence Estimates has now been completed. Steps to implement its proposals will be announced shortly.

Engineering Training

424. The comprehensive study of the structure and training of the Engineering Branch of the Royal Navy has now been completed. The changes which are being made are designed to ensure that officers and ratings of the Branch are better trained and organised to deal with modern weapon and propulsion systems. Flying Training

425. A number of Royal Navy pilots are now training with the Royal Air Force for Sea Harrier flying duties. After conversion to the Harrier, they will carry out operational flying training on the RN Sea Harriers based at Royal Naval Air Station (RNAS) Yeovilton. The Lynx training squadron formed at RNAS Yeovilton in January 1978 and is due to remain there until the early 1980's when it will move to RNAS Portland. Jetstream aircraft are being converted to replace the Sea Prince for basic flying training for RN helicopter observers from 1979.

426. There have been three significant developments in Royal Air Force pilot training. The Hawk has been introduced into service for advanced pilot training and tactical weapons training; the Jetstream has been re-introduced for advanced pilot training and refresher flying on multi-engine aircraft; and a new advanced training course using the Wessex has been established for helicopter pilots. Both the Hawk and Jetstream courses make extensive use of advanced simulators. The first RAF pilots also began their operational training on the Sea King helicopter at RNAS Culdrose last November.

427. RAF Finningley is now the centre for all navigator, air electronic and air engineer training. Further progress has been made with the redeployment of training units; the major elements of the Central Flying School are now co-located at RAF Leeming and other elements of the flying training task are being distributed between the RAF College Cranwell, RAF Linton-on-Ouse and RAF Finningley.

Other Training

428. As part of the process of rationalising shore training the School of Maritime Operations at HMS Dryad is being further developed to accommodate related tasks from other training establishments. HMS Daedalus will remain at Lee-on-Solent in modernised accommodation instead of being transferred to the former RAF airfield at Thorney Island. The latter has been transferred to the Property Services Agency for disposal.

429. Steps have been taken to increase the number of junior Regular Army officers with a knowledge of a foreign language. When the proposed measures are in full operation, it is expected that the number of officers trained to colloquial standard in a NATO language will increase from 100 to 250 annually. Most of them will have been trained in German.

NATO Training

430. All three Services continue to play an active part in the process of developing NATO training. Examples of international co-operation in this field are Lance missile training, naval control of shipping training and a pilot course for long-range reconnaissance patrols in the context of land warfare.

431. The Governments of the United Kingdom and the Federal Republic of Germany have agreed in principle that a Tornado training establishment responsible for aircrew conversion training should be set up at RAF Cottesmore; confirmation of Italian participation is awaited. Detailed planning is under way and, subject to final agreement, training is planned to start with the introduction of the Tornado into service.

432. The possibility of establishing a tri-national Weapons Conversion Unit for the Tornado in Sardinia has had to be abandoned because facilities on the required scale could not be provided there. It is now hoped to establish a bi-national Weapons Conversion Unit at RAF Honington where British and German aircrew will be taught to handle the Tornado as a complete weapons system.

433. NATO and other countries also use some of the helicopter pilot training and basic observer flying training provided by RNAS Culdrose.

Commonwealth and Foreign Training

434. During 1977 about 7,000 military personnel from many Commonwealth and foreign countries attended training courses in the United Kingdom. In addition, the three Services also provide personnel on loan and in training teams to assist with local training.

435. The defence support organisation has undergone many substantial changes since the unification of the Ministry of Defence in 1964. The constant objective has been to cut the cost of support to the maximum extent possible without damaging the service to the front-line.

436. Over the years major economies have been made including the rationalisation between the Services of the management of some 20 ranges of stores and equipment; the setting up of common or integrated services, such as the Defence Lands Organisation and the Claims Commission; the integration of the Ministry of Defence Police and the creation of a unified Defence Communications network; the amalgamation of the four Admiralty Supply Departments; the rationalisation of the Army's supply, transport, movement and repair functions; a reduction of the RAF's organisational structure in the United Kingdom from 8 RAF Commands and 9 Groups to 2 RAF Commands and 4 Groups; new working and management techniques; the reduction of overheads and of manpower; and the use of fewer locations and the more economical use of accommodation. Since the 1974 Defence Review this latter process has been accelerated. For example, over 100 sites have been, are being or will be given different roles, transferred between Services or given up. About 20 other proposed closures or changes have been announced or are at various stages of consultation.

437. Opportunities for further economies, especially through closer collaboration with our NATO Allies and also through further inter-Service rationalisation in remaining areas, will continue to be examined closely. But we do not expect, after the achievements of the last few years, that there will be a great deal of scope for large further savings in this field.

NATO CO-OPERATION IN LOGISTICS

504. In recent years there has been growing emphasis throughout the Alliance on making better use, through collaboration, of NATO logistic resources. The United Kingdom plays its full part in this area, and attaches high priority to collaboration throughout the logistic field wherever it is militarily and economically advantageous and consistent with political and industrial considerations. The emphasis given to logistic support in the NATO programme of short-term and long-term initiatives set in hand following President Carter's statement to the North Atlantic Council in May 1977 is particularly welcome. The United Kingdom also attaches importance to the work of the Eurolog Committee and provides the Chairman for both the Eurolog Steering Committee and its Naval Sub-Group. Important areas under consideration in NATO logistics and civil emergency planning studies include the provision of further civil air and sea transport to enable countries, especially the United States and Canada, to reinforce Europe as quickly as possible in an emergency. The United Kingdom has for its part made satisfactory arrangements for the use of civil air and sea transport for our own forces, and arrangements for the support of American lines of communication through the United Kingdom are proceeding satisfactorily. Other studies of importance concern the arrangements for the provision and storage of war reserve stocks and, in response to the short-term initiatives, the United Kingdom is increasing its holdings of some key items.

Achievements in collaborative procurement, standardisation, and interoperability of weapons and other equipment should also permit greater collaboration in the field of logistic support. Guiding principles for the collaborative support of common equipments were agreed by Eurogroup Ministers in 1975 and are now being applied wherever possible. As a result, for example, the NATO Maintenance Supply Agency (NAMSA) undertakes spares support for the FH70 Field Howitzer and CL89 DRONE for the armies of the United Kingdom, the Federal Republic of Germany and Italy, as well for the Lance missile and NATO Air Defence Ground Environment (NADGE) air-defence radars. There are many further examples of direct bilateral and multilateral collaboration between the Allies. Some current examples include:

a. a comprehensive overhaul and repair facility for marine gas turbine engines at the Royal Naval aircraft yard at Fleetlands to service engines of the Royal Navy and other NATO navies;

b. the provision by the Army of support for the British and Belgian armies for tracked combat reconnaissance vehicles, and for the British, Danish and German armies for the Medium Girder Bridge. Similar arrangements covering Swingfire support for the British and Belgian armies are under consideration;

c. the provision by the Royal Air Force of logistic support for aircraft purchased from the United Kingdom by the Norwegian and Belgian air forces and the Royal Netherlands Navy. Co-operative arrangements between the United Kingdom, the Federal Republic of Germany and Italy are already in hand for the support of Tornado when it comes into service. The two-way support arrangement for Jaguar, between France and United Kingdom, has been enhanced by a direct ADP data link between the French computer at Bordeaux and the Supply Control Centre at RAF Hendon. Progress continues to be made on logistic support arrangements with the United States Air Forces in Europe for whom United Kingdom industry is to undertake some depot-level maintenance of F111 aircraft.

Collaborative arrangements with the United States for the support of RAF Phantom and Hercules aircraft are working well. Important studies are continuing on the development of cross-servicing procedures and techniques so that aircraft of one NATO air force can be operated and maintained from another's bases.

INTER-SERVICE CO-ORDINATION OF SUPPORT

508. In the continuing search for economies in the support area, the Ministry of Defence has initiated studies into the practicality of making a single Service responsible for the supply of electrical and electronic equipment, and hand tools. This follows the earlier and successful rationalisation of the supply of air stores, motor transport stores, food and other ranges of materiel in common use.

509. 1977 has seen the completion of the main part of the inter-Service project to enable the next generation of supply computers to exchange data and rationalise further the support between the three Services. The project will be implemented as the new generation of ADP supply systems are introduced between now and the mid-1980s.

510. The National Economic Development Organisation (NEDO) report on the use and application of standards in engineering industries (The Warner Report) made favourable comments on standardisation work within the Ministry of Defence. British Standards are adopted whenever possible for procurement purposes, supplemented, when necessary, by a wide range of Defence Standards. The Ministry of Defence has also played an important part in establishing the new NATO Committee of Directors of Standardization which will encourage wider acceptance of standards and component specifications throughout the Alliance. The first Chairman of this Committee is the Ministry of Defence Director of Standardization.

511. The Ministry of Defence headquarters staff of the three Medical Directorates will this year be brought together in one building. Further progress has also been made with the re-organisation of Service hospitals. During the past year the RAF hospital at Wroughton was reformed as a joint RAF/Army hospital on the closure of the Military Hospital, Tidworth. The new Queen Elizabeth Military Hospital at Woolwich has been commissioned and has replaced four other military hospitals and will replace a fifth later this year. The Joint Services Medical Rehabilitation Unit at RAF Chessington will also be merged with the RAF Medical Rehabilitation Unit at RAF Headley Court in 1981. CONFIDENTIAL

RAF Hospital Cosford was closed at the end of 1977 and studies are continuing into the proposal that either RAF Hospital Ely or RAF Hospital Nocton Hall should be closed.

ROYAL NAVY SUPPORT ORGANISATION

512. Satisfactory progress has been made in achieving the staff reductions in the Fleet support organisation that were announced in the 1976 and 1977 Statements on the Defence Estimates. Several establishments will have closed by the end of the year. The Royal Navy has also decided not to retain the former RAF Thorney Island, which has been transferred to the Property Services Agency for disposal.

Naval Dockyards

513. There is more than a full programme of work available for all the Naval dockyards for the foreseeable future. For the forthcoming year a number of measures have already been taken to bring the load into better balance with available capacity, including some increase in the use of commercial ship repair facilities. First priority, however, is being given to improving dockyard productivity as a means of increasing capacity.

514. Work on guided-missile destroyers and larger ships will be concentrated at Portsmouth which also has a full supporting programme on patrol submarines and other vessels. The refitting and refuelling of nuclear submarines will remain the major tasks for Chatham and Rosyth in addition to their supporting programmes of major and normal refits of frigates, other ships and craft, and a steady programme at Rosyth on patrol submarines. Devonport will make an increasing contribution to the upkeep of nuclear submarines in addition to undertaking the major share of Leander Class frigate modernisations and other support, including, for example, the new Type 21 frigates.

**Vessels**

515. The new Fleet replenishment ship, RFA Fort Grange, will now enter service during 1978, replacing RFAs Tarbatness and Retainer. Another ship of the class, RFA Fort Austin, is under construction and will replace RFA Resurgent. The RFAs Tidereach and Empire Gull will be withdrawn during 1978. A new Royal Maritime Auxiliary Service vessel, RMA.S Throsk, was introduced into service in September 1977, replacing two old vessels and providing the principal means of coastal transport for naval armament stores.

**Automatic Data Processing**

516. The increasing use of computers in the Fleet support organisation is helping to produce greater economy and efficiency, for example, as an aid to workshop production control in the pipe and electrical shops of each of the home dockyards. Pilot schemes will investigate their possible extension to other dockyard departments. Another ADP project now under way is the direct linking of the Royal Naval Air Stations and the Naval Aircraft Repair Organisation with the Royal Air Force's central computer for air stores at Hendon. ARMY SUPPORT ORGANISATION

517. The measures to be taken for the Army's logistic restructuring, including the concentration and reduction of storeholding and repair facilities, are progressing well, and the world-wide target reduction of 5,400 civilian staff will be made by 1 April 1980. Some 45% of the manpower savings have already been achieved. Closures in the past year have included the Royal Electrical and Mechanical Engineers workshops at Killingworth in Tyne and Wear and at Coypool near Plymouth, and the regional ordnance depot at York. There has also been a substantial reduction in staff at the regional depot in Hereford. The Army Logistic Executive formally came into existence in April 1977, and its major elements have been established at Andover as the basis of an integrated logistic command and control organisation.

In August 1977 the decision was announced to close the Central Ordnance Depot, Chilwell as part of the reorganisation of the Central Ordnance Depots. Stores held at Chilwell will be transferred to Donnington and Bicester and substantial financial savings in manpower and overheads are expected when the reorganisation is completed.

518. The re-location of Army Manning and Records Offices and Regimental Pay Offices will progress significantly in 1978 so that about 60% of the relocation programme will have been achieved by the end of the year.

519. The Army has also been conducting a thorough study of its accommodation requirements. This involves taking account of certain contingencies and the distribution of units throughout the country, and reviewing all its assets including those taken over from or planned to be taken over from the Royal Air Force. This offers opportunities to make use of better and newer accommodation and to contribute to the forecast release of a substantial amount of property in 1978. Subject to the outcome of consultations with other interests involved, the surplus will include: Hopton Barracks, Devizes; Norton Manor Camp, Taunton; Chaucer Barracks, Canterbury; Haig Lines, Church Crookham; Royal Victoria Hospital, Netley; the Royal Armoured Corps Manning and Records Office, Whetstone; and Sherford Camp, Taunton. In addition, a number of miscellaneous, small properties will be put up for disposal.

ROYAL AIR FORCE SUPPORT ORGANISATION

Economy in Support Costs

520. The merger of Support and Training Commands was completed in June 1977 resulting in the closure of RAF Andover. The new integrated organisation, known as RAF Support Command, has its headquarters at RAF Brampton.

521. Proposals for the rationalisation of ground radio engineering tasks are still being considered. Support Command Signals Headquarters and the Radio Introduction Unit moved to RAF Benson in March 1977, enabling RAF Medmenham to be transferred for use by the Ministry of Defence Police Training School.

522. The transfer of engineering tasks from the Maintenance Units (MUs) at Aldergrove and Sydenham is proceeding as planned and should be complete by 31 March 1978. These transfers, together with those reported in last year's Statement on the Defence Estimates, will concentrate repair resources at the remaining MUs. In particular this will allow the centralisation of previously dispersed facilities for equipment repair at No 30 MU/RAF Sealand for avionics and at RAF St Athan for engines of fixed-wing aircraft and for mechanical components, thus further strengthening in-Service support for front-line aircraft.

523. Further improvements have been made in the use of computers to control the supply of expensive assets. The system for the control of aero-engine supply has been expanded to include all modular engines for which the Royal Air Force are responsible, and the RAF Supply Control Centre has developed techniques to improve forecasting of spares requirements for Tornado, Nimrod and Hawk aircraft. A Density Activity Complex was formally opened at No 16 MU RAF Stafford on 6 April 1977. In this complex advanced material storage and handling techniques have greatly enhanced the speed and cost-effectiveness of supply. The complex absorbed a large proportion of the stock from No 25 MU RAF Hartlebury allowing that unit to be closed in September 1977.

524. HQ Provost and Security Services (UK) and two subordinate units were amalgamated and relocated at RAF Rudloe Manor.

525. The Officers' and Aircrew Selection Centre at RAF Biggin Hill will move to RAF Bentley Priory in 1981, and most of the land and buildings still held by the Royal Air Force at Biggin Hill will be sold. A small enclave, including the Battle of Britain Memorial Chapel and the Officers' Mess which will accommodate the RAF Chaplains' School transferred from Amport House, Andover will, however, be retained. This will preserve a link between the Royal Air Force and Biggin Hill which has played such a prominent role in RAF history.

LANDS

526. The Ministry of Defence has continued to reduce its holdings of land in keeping with its established policy of disposing of all property for which there is no foreseeable defence requirement. The area of land held on leasehold and freehold was reduced by a further 4,500 acres in the year ended 30 September 1977, making a total of 33,400 acres over the five years up to that date, and the process of contraction and redeployment resulting from the Defence Review will enable the release of more land in 1978.

527. With one exception, all the recommendations in the report of the non-statutory inquiry conducted in 1975/76 by Baroness Sharp into the continued use of Dartmoor for military training have been accepted in principle and are receiving detailed consideration.

528. Continuing attention is given to the need for conservation on defence lands. Nearly 100 Service conservation groups have been formed and valuable links with external organisations and societies are maintained. LIVING ACCOMMODATION

529. Single and married quarters in the United Kingdom and overseas are continuously improved to bring them up to modern standards although in certain areas, such as Northern Ireland and Belize, operational considerations constrain the standards that can be achieved. Progress is also necessarily affected by wider budgetary considerations, and has been slower in the last year than originally planned. It is proposed to begin an extended programme of thermal insulation of married quarters, including the filling of wall cavities where appropriate.

530. The hire of married quarters for all three Services will cost about £43 million in 1978/79. Most of the expenditure is incurred in West Germany where an increase of about 1,000 hirings is foreseen although the number of hirings worldwide is expected to be about the same as in 1977/78.

531. The number of married quarters in the United Kingdom continues to be reduced in step with the fall in demand that has been a feature of recent years. This trend is producing an unavoidable but disturbing level of vacant married quarters. To keep this level to the minimum, quarters are passed to the Property Services Agency for disposal as soon as it is clear that there is no long-term need for them. In the year ended 31 October 1977 some 1,600 quarters were declared surplus to requirements. Where it is essential to retain vacant quarters for any significant period against future requirements, temporary uses are sought including leasing agreements with local housing authorities. WORKS

532. About half the works budget is spent on new construction, and priority is given to work required to permit the introduction of new weapons systems and other operational requirements, reorganisation and high priority training. Thus the major features of the programme will consist of the continued modernisation of naval bases and training establishments; the Army's restructuring and continuous improvement of the Army's estate; the introduction of the Tornado aircraft; and the rationalisation of the R & D establishments. The remainder of the works budget is spent on maintenance including some large projects such as airfield pavement resurfacing.

533. Next year an additional £8 million will be spent as part of the Government's measures to assist the construction industry. This will be spent mainly on further projects to improve the Army's living and working accommodation; projects affecting operational requirements and safety measures; measures designed to conserve energy; and a large number of relatively small but important jobs to improve the condition of the defence estate.

ENERGY CONSERVATION

534. Energy consumption during 1976/77 has continued to be closely monitored and savings of approximately 10% over consumption of the early 1970's have been achieved for the third year. in succession. At one Royal Ordnance Factory substantial progress has been made towards a target saving of 25% in steam-raising by modifying control systems and other means. One R & D establishment has been able to reduce its fuel bill by some 30% by changing the type of fuel burnt and three Ordnance Depots in BAOR have between them saved nearly two million litres of furnace fuel oil in the last year by a combination of good housekeeping, technical improvements and better use of buildings. The Royal Air Force has replaced the heating systems in three hangars at a major operational unit and this should reduce operating costs by 60% enabling the capital cost to be recovered in less than two years.

MOVEMENTS

535. The Royal Fleet Auxiliary logistic landing ships and overseas store carriers fill a major role in meeting the freighting requirements to and from our Service establishments abroad, including the initial stages of the important task of running down the Malta base. In addition they have been engaged in the movements tasks associated with military exercises. A logistic landing ship is due to start a regular schedule every 4-5 days between Marchwood military port and continental Europe in early 1978 and this will further improve military container distribution.

536. Simplified and more economical procedures for the movement of RAF air and surface cargo were introduced during the year, providing substantial cost savings.

537. Fluctuations in force levels in Northern Ireland and the reinforcement of Belize during 1977 have made additional calls on movement resources but without detriment to the overall scheduled movement of passengers and cargo by air.

METEOROLOGY

538. Although the Royal Air Force, Civil Aviation and the general public remain their principal customers, the Meteorological Office's services have been expanding in several other areas notably in support of agriculture and the off-shore oil industry. Special procedures have also been developed to support the routine operations by Concorde aircraft. The revenue earned by the Meteorological Office from all sources now amounts to about one third of the total expenditure.

539. Two ocean weather ships have been extensively refitted to enable the United Kingdom to maintain observations at one station in the reduced four-station network of the present North Atlantic Ocean Station scheme.

540. The further development of the satellite-receiving station at Lasham has continued in collaboration with the Royal Aircraft Establishment at Farnborough. The station is providing a valuable service for both forecasting and research in the form of data from existing meteorological satellites, and will be able to receive data from future satellites including the European meteorological satellite METEOSAT.

541. Research activity designed to support all the services provided by the Meteorological Office, has continued covering a large number of subjects and in particular special attention has been given to questions affecting aircraft safety, such as wind shears at low levels and the icing of helicopters.

OTHER SUPPORT

Management Review

542. Many of the major recommendations of the Management Review of the Ministry of Defence headquarters have now been implemented including the proposed reduction in the number of Accounting Officers from six to two and the closer integration of several Procurement Executive functions with those of the rest of the Ministry.

543. It has been decided not to proceed with the proposal, announced in last year's Statement on the Defence Estimates, that the post of Chief of Personnel and Logistics should lapse. The Chief of Personnel and Logistics will, instead, assume certain responsibilities previously discharged by the Vice Chief of Defence Staff. The post will be re-titled Vice Chief of Defence Staff (Personnel and Logistics), and will carry membership of the Defence Council. The post of Vice Chief of Defence Staff will lapse.

Manpower Savings

544. The number of Ministry of Defence civilians for whom provision has been made in the Defence Estimates is 269,500 on 1 April 1978 and 264,000 on 31 March 1979. In addition some 23,500 are employed in the Royal Ordnance Factories; their costs are met from the Trading Fund. In the period 1964 to 1974 civilian strengths were reduced by 114,000 on a broadly comparable basis. By April 1979 the number of civilians working in the Ministry of Defence, including Property Services Agency staff working on behalf of the Ministry, is expected to show a reduction of 40,000 on 1974 strengths after allowance for organisational changes which have taken place meanwhile. During 1978/79 numbers are expected to fall by 5,500, including headquarters staffs. This is the final stage in the achievement of the reduced civilian manpower targets set as part of the 1974 Defence Review and the subsequent expenditure reviews in 1975 and 1976. The rundown will have been carried through with the minimum of compulsory redundancy.

The combined Service and civilian reductions in headquarters staff arising out of the Management and expenditure reviews should result in savings approaching 9 to 10% of 1974 headquarters numbers by April 1979. The intention is to find still further economies by the early 1980's, including savings in senior posts.

Apprentice training

The Ministry of Defence continues to train significant numbers of civilian apprentices. The entry for 1977 was about 2,000 and there are now some 7,500 young men in training. The Ministry thus has roughly one apprentice for every five craftsmen compared with the ratio of one to nine in industry generally. Nevertheless the problem of recruiting skilled men continues, a reflection of the general shortage of skilled men. The Ministry therefore intends to expand the apprentices entry in the coming year. Dispersal

547. Forward planning to meet the Ministry's commitments under the Government's dispersal programme is going ahead. The programme involves the dispersal of some 4,250 Ministry of Defence posts to Cardiff by 1983/84 and up to 5,500 to two locations in Glasgow, 1,500 posts by 1983/84 and the remainder by 1985/86 - 1987/88. After the dispersals, the bulk of the Ministry's procurement policy work will be concentrated in the west of England and south Wales, while Glasgow will become another major administrative centre. INTRODUCTION

548. In this paper I seek to give my colleagues a first and necessarily only general view of the prospect and problems before us. We will be able to consider these matters in more depth and detail in a few weeks, when we shall have the new economic forecasts and can assess their implications. That will be the time to form a judgment on the appropriate size of fiscal stimulus for the spring Budget, and to choose between the range of methods available for producing it. It would not be profitable at this stage for us to discuss precise figures (of the kind suggested by the Secretary of State for Social Services and the Minister for Social Security - see Annex to this paper), which would have to be plucked largely out of the air.

549. This paper therefore concentrates rather on the background to the Budget and the relationship between our various objectives, and discusses some of the uncertainties which will inevitably surround the decisions we shall ultimately make.

DEVELOPMENTS SINCE THE OCTOBER MEASURES

3. The object of the October measures was to produce more jobs and investment by building on our dramatic financial recovery to promote a corresponding recovery in the real economy. We described the measures as part of a programme of economic recovery spreading over 18 months. It may be helpful, therefore, to begin by reviewing developments in the economy since October, and noting how these have differed from the projections which we published at that time.

4. Since October, some trends have begun to establish themselves more clearly, but great uncertainties remain. There are three areas, in particular, where events have developed differently from what we then projected. Sterling has come under greater upward pressures than we expected - largely as a consequence of the weak dollar - and has appreciated 5 per cent. The increase in earnings during this pay round so far has been a little above the 10 per cent guidelines. Though this is better than we might have feared it is still well above the rate of increase among our main competitors, who also enjoy a higher growth in productivity than we do. The latest figures suggest that the increase in unit labour costs this year will be increasing at between 4½ and 5 per cent in our main competitors and well over twice as fast in the United Kingdom. World trade has been increasing very slowly: forecasts of economic growth this year have been revised downwards; and only in North America can we expect actual expansion to keep pace with the potential for growth.

5. Looking ahead, there is a very good chance now that we shall see single figure inflation right through the year, if our incomes policy holds at least as well as it has done so far, and there is no sharp fall in the sterling exchange rate. On the other hand, it is probably unrealistic to expect to hold the rate of inflation at this level far into 1979, if earnings continue to increase at their present rate; and we should be facing very serious dangers once again, if wage increases were to accelerate and confidence in sterling were shaken.

6. Taken together, these factors probably indicate that (in the absence of further fiscal action) we must now expect a growth rate lower than the 3½ per cent which we projected on the assumptions of last October, but also a worse balance of payments. The function of the spring Budget must, therefore, be to stimulate demand in a way which produces and sustains more domestic output, and thus produces more jobs. If we failed to control the inflationary pressures, which may build up as we move into 1979, we would risk cutting short the recovery in its early stages. This in turn has implications for the size of the fiscal stimulus which we can afford to give, without prejudicing our own objectives. If we were to lose the confidence of the financial markets, this would bring the familiar destructive consequences for our hopes of increased investment, for financing our domestic borrowing requirement and for the value of sterling. So we need to keep a limit on the public sector borrowing requirement and to keep control of the monetary aggregates.

7. Even with North Sea oil flowing, the balance of payments will not look after itself. To expand domestic demand at a rate which would push the current account into deficit would itself be a severe blow to confidence. It would also cause major problems in another area of particular importance - that of our overseas debts. My objective is to spread out our debt repayments over a much longer period - so as to minimise what could otherwise be a troublesome constraint on our ability to maximise our rate of growth. This means undertaking a programme of new borrowing overseas, in order to finance the repayment of our existing debts as they mature. For this purpose we need to run a balance of payments surplus over the next few years which is sufficient to maintain our credit in overseas financial markets.

8. In brief, we need to set the right intermediate objectives for the money supply, the public sector borrowing requirement and the balance of payments, if we are to increase our domestic output and employment to the maximum. The way in which we expand domestic demand will to a significant extent determine the amount by which we can effectively expand domestic output. For reasons which I explain later in this note (and despite what is said in CP(78)10) in the present situation tax cuts will help us more than a further addition to public expenditure.

MAIN AREAS OF UNCERTAINTY

09. There is great uncertainty, and wide disagreement among economists, not only about the course of growth, employment, and inflation in Britain over the next year or so, but also about changes that seem to be taking place in previously established economic relationships and in the effectiveness of the policy instruments available.

10. First, the exchange rate. According to a view held by many economists, an appreciation of the exchange rate will in due course bring about a significant and measurable worsening in the balance of payments and the level of domestic activity - though there will be a long lag before the full effects come through and (other things being equal) after a further lag the effects will eventually wear off as inflation comes down. This is the converse of the well-known J-curve resulting from depreciation. Such economists acknowledge that there is a great uncertainty about the length of the lags - how long it will be before the full effects come through on the domestic economy, and how long it will be before the effects subsequently wear off. As against that, quite apart from the school of monetarists which believes that appreciation does much more good than harm, other economists, while they accept the broad analysis described above, believe that a strong domestic currency will produce benefits on inflation and improve confidence more generally, to a degree which may make it worth accepting the adverse effects of an exchange rate appreciation. Here again there is great uncertainty about the speed with which the beneficial effects will come through, and therefore about the size and duration of the transitional costs - particularly in terms of unemployment and the balance of payments.

11. In any case, there is general agreement that the power of Governments to control the course of the exchange rate is strictly limited. The volume of funds which can be moved across the exchanges is much greater than Governments can offset for more than a short period of time. In our case the effects of North Sea oil are likely to mean that the exchange rate will be higher for the next few years than it would have been otherwise. How the exchange rate moves from its present level will depend on the development of the economy as a whole, of which North Sea oil forms an important, but minor part.

12. Second, unemployment. Over the 12 months to September 1977 domestic output probably increased very little. The labour force increased by nearly ¾ million. Yet employment rose by 100,000 mainly in manufacturing industry; unemployment rose by 150,000 (indeed only 90,000 over 1977 as a whole). Unfilled vacancies rose by 20,000; this January they are higher than at any time since March 1975. No-one in or out of the Government predicted this combination of events. It is impossible to be sure what it implies for the future. If these relationships continue to apply then a growth rate of some 3 per cent would bring about a steady and lasting fall in unemployment sooner than the traditional arithmetic would suggest. Alternatively, it may be that our special employment measures last year had more effect than we predicted, and that employers for their own reasons have been holding on to a larger labour force than they need for current production; if that were the case, it could on the contrary dampen the effect on employment of this year's acceleration in the growth rate.

13. Third, investment. We are all agreed on the need to see more profitable investment in productive industry. But there is no such general agreement on how best to achieve this. What is clear is that the readiness of industrialists to invest depends in part on their general state of confidence, in part on their belief that the demand for their products will be sustained at a level above their existing capacity to supply them, and in part on their having a level of profitability which will provide adequate funds for investment now, and reasonable expectations of an adequate return on that investment in the future. In fact private manufacturing investment was 13 per cent higher in the first nine months of 1977 compared with the same period in 1976.

ASSESSMENT

14. Whatever view one takes of these uncertainties, one thing is certain. If we stimulate demand to a degree which seriously outstrips the ability of domestic industry to supply it - either because we are unable to expand output quickly enough, or because we are not sufficiently competitive in price or quality - then the excess demand will result in excessive imports and greater inflationary pressures. These in turn will drive down the exchange rate - possibly drastically if confidence evaporates - and any immediate benefit to the current balance would be wiped out by the consequences of higher inflation. The result would be higher unemployment and a further erosion of our manufacturing base.

15. General import controls would provide no easy escape from that danger. First, to the extent that we succeeded in keeping out imports, the immediate effect could only be to increase inflation further. Second, in practice, as a large net exporter of manufactures, we could only improve our net balance of external trade, if we avoided damaging retaliation by other countries. We would have to win the consent of our major trading partners; indeed, under the Treaty of Rome we have no legal power to enforce general import controls, without the consent of the Community. In our present circumstances there is no prospect of gaining this consent: they have much the same unemployment problems as we do; and they would regard it as particularly provocative of us to attempt to export our unemployment to them, at a time when unlike them we are enjoying the unique benefits of North Sea oil.

16. Thus, if we are to stimulate domestic demand in a way which maximises domestic output and employment - rather than imports and inflation we must do everything that we can to increase the volume and competitiveness of production in Britain. This depends on many factors. It is not just a question of earnings and the exchange rate; some of us believe that policy has in the past given undue emphasis to these aspects. In the long run, the key to competitiveness is the difference between increases in earnings and increases in productivity - we must ensure that this difference is no wider in Britain than among our major trade competitors. We can achieve this objective just as well in principle, and a great deal more profitably in practice, with high earnings and high productivity growth as with low earnings and low productivity growth. If we cannot get the former, we must settle for the latter. What we cannot afford is high earnings, but continuing low productivity. That is why we have identified productivity as the prime objective of the industrial strategy, both in the directly industrial work being carried forward by the Sector Working Parties and in our discussion of the wider aspects (CM(77) 34th Conclusions, 27 October 1977). It must remain a central objective for the whole of Government policy in the coming years.

17. Meanwhile, however - given the strict limits on Government's power to influence either productivity or the exchange rate, there is no escape from the fact that we must reduce the rate of growth of money incomes. Wage costs remain the key to competitiveness in the short term. For the coming year, therefore, I believe that we should concentrate the room for fiscal manoeuvre which we deliberately left last autumn mainly on reductions in the burden of income tax: and this is where the Trades Union Congress also have put their first priority. For public expenditure we ought to stick to plans we have just published - including the £1 billion increase which we announced last October. So we must keep any further increases we feel are inescapable within the margin provided by the contingency reserve. The case for concentrating on tax relief at this stage is overwhelming. It will not only provide the steady and sustained expansion of demand, which is needed to supply the essential incentive for new investment, but will also strengthen the incentives for better performance by industry and our export services. Above all, it will create the conditions in which we can realistically expect working people in the next pay round to settle for earnings increases well within single figures. It will give them confidence that they can get a worthwhile increase in their living standards without demanding increase in money wages so high as to send prices and unemployment shooting up again.

D W H

Treasury Chambers 31 January 1978 Since originally drafting this note, I have seen the paper by the Secretary of State for Social Services (CP(78)10). We can discuss his detailed expenditure proposals at the proper time. However, it may be helpful if I make three general comments now.

2. First, the Secretary of State does not explain the basis on which he has chosen £3 billion as the correct fiscal stimulus in my spring Budget. As I have explained above, this is not a figure which we can pluck out of the air. It must take account of the implications for domestic output, for inflation and the monetary aggregates, and for the balance of payments. It thus requires a major economic and political judgement which can be made only after we have had the best available picture of the economic prospect including the new short term forecast, the latest indication of pay settlements over the round, and some idea of what is happening to the savings ratio.

3. Second, the Secretary of State makes much of 'unplanned deflation' in 1977 'due to massive shortfall in public spending'. Certainly there seems likely to be an undesirably big shortfall in 1977/78 in our spending programmes, as conventionally measured (in survey prices) in the Public Expenditure White Paper. However, it is important to keep this in proportion. Shortfall is not a new phenomenon and it has therefore consistently been provided for in our economic and Budget planning, as reflected (for example) in the annual Financial Statement and Budget Report (FSBR). In the latest year for which we have firm figures - 1976/77 - the total cash outturn on public expenditure was within some £100 million of the total provided for on this basis in the 1976 FSBR, and reflected in the estimates of the public sector borrowing requirement which we published at the time of the 1976 Budget. We do not yet have a firm estimate for this year's outturn (1977/78). However, the latest indications are that, discounting the changes in export credit financing, which do not reflect changes in real activity, the shortfall on this basis is likely to come out at something under £500 million - or well under 1 per cent.

4. Third, the Secretary of State suggests that some forms of public expenditure have the same broad economic effects as tax cuts. This is true only of some forms of expenditure, and then only to a limited extent. Thus, increases in child benefits can certainly stimulate demand and have some helpful effect on incentives in the area of the poverty trap, similar to increases in tax thresholds. However, they are unlikely to make the same contribution to our pay and counter-inflation policies, by buttressing the real take home pay of those at work. Indeed, the whole point of taking child tax allowances away from fathers, and substituting a child benefit payable to mothers, is that in many families husband and wife do not share and share alike their several incomes; and this is precisely the point which originally worried the TUC and persuaded us to phase in child benefits over a period of time. CABINET

DRAFT WHITE PAPER ON THE NATIONALISED INDUSTRIES

Note by the Chancellor of the Exchequer

1. I attach a draft White Paper on the nationalised industries. It replies to the highly critical report which the National Economic Development Office published in November 1976 and to the National Consumer Council's report of August 1976 on "Consumers and the Nationalised Industries".

2. Following discussion by the Ministerial Committee on Economic Strategy (EY), paragraph 54 on future price increases has been amended, and a reference to the work of the Select Committee on Procedure has been added to the end of paragraph 93. Apart from these two points EY approved the draft. This draft now includes, in paragraph 29, a brief reference to the industrial democracy White Paper and, at the end of paragraph 20, a reference to the fact that the Electricity and Nuclear Materials Bill includes a provision to enable specific directions to be given to the electricity supply industry.

3. With the other Ministers concerned, I discussed the main proposals in July with the Nationalised Industries' Chairmen's Group. Since then some new ideas have been introduced and I recommend that, before the White Paper is published, each sponsoring Minister should send the chairmen of his industries a summary of the main points. I will arrange for the Official Committee on Nationalised Industry Policy to prepare this.

4. I invite the Cabinet to agree that the White Paper should be published in March, after the chairmen of the industries have had an opportunity to see the summary and with any minor amendments necessary to keep it up to date.

D W H

Treasury Chambers

2 February 1978 Contents

Introduction

INSTITUTIONAL ARRANGEMENTS

12-19 Board structure: rejects the NEDO's proposed Policy Councils and Corporation Boards

20-22 New powers to give specific directions, and compensation when necessary

23-25 Pay and appointments of Board Members

26-27 Composition of boards, including civil servant members

28-29 Industrial democracy

30-39 Consumer councils

40 Other consultative arrangements eg Energy Commission

41-42 Relations with suppliers

43-47 Corporate plans and investment and financing reviews

48-51 Monitoring

THE FINANCIAL AND ECONOMIC FRAMEWORK

52-57 General

58-65 Investment and the opportunity cost of capital: introduces the 5% Required Rate of Return (see also Appendix I)

66-68 Pricing policy

69-75 Financial targets

76-78 Performance indicators

79-82 Cash limits

83-85 Capital structure and sources of finance: general points

86-88 Public dividend capital

89 Financing the British National Oil Corporation

90-92 Loans from the NLF

93 Conclusions APPENDICES

I

The RRR: 1-12 discuss the system; 13-19 the 5% number

II

List of financial targets already set

III

Explanatory section on NLF and foreign currency borrowing I INTRODUCTION

1. This White Paper replies to the recommendations in the report of November 1976 by the National Economic Development Office, "A study of UK Nationalised Industries: their role in the economy and control in the future." It takes into account the Government's proposals for developing industrial democracy in the nationalised industries, and it explains the Government's main proposals in response to the report of August 1976 by the National Consumer Council on "Consumers and the Nationalised Industries".

2. The White Paper is about the control of the nationalised industries, their financial and economic objectives, and their relations with government. It sets out proposals designed to reconcile the purposes of public ownership with the independence needed for vigorous and enterprising management; and to ensure that the nationalised industries employ resources efficiently to the benefit of the whole community. Section II describes a number of institutional changes intended to improve the relationship between the nationalised industries and Government, unions, customers and suppliers. It explains how information on the industries' main objectives, agreed after discussion between the Government and the boards, and on their performance will be published. Section III discusses the financial and economic framework within which the industries will operate, and in particular the role of the financial targets which will be published for all the industries and used as a measure of their success.

3. The central problem in evolving an acceptable relationship between the Government and the nationalised industries has always been how best to reconcile the boards' need for sufficient freedom to manage the industries with the Government's legitimate interests in them. The Government must be concerned in the strategies, and operational decisions of public importance, of industries which are basic to the national economy; in seeing that these industries, which are not subject to the private sector discipline of the threat of bankruptcy, and are in some cases relatively free from market pressures, are efficient; and in ensuring that there is an acceptable return on the public capital invested in them.

4. The last general review of the economic and financial principles common to all nationalised industries was the White Paper of 1967, "Nationalised Industries: a review of economic and financial objectives," Cmnd 3437. That White Paper was intended to show how investment, pricing and efficiency policies would be taken into account in setting financial objectives, rather than to make any change in the basic relationship between the Government and the nationalised industries. It explained that, subject to allowance where necessary for social objectives or for meeting statutory obligations, it was the Government's policy to treat the nationalised industries as commercial bodies so far as the expected return on investment was concerned. It set out criteria for investment appraisal and pricing policy, which were intended to ensure that the nationalised industries did not claim resources which could have been put to better use in other parts of the economy. It stressed the importance of setting the industries clear financial targets which would serve both as an incentive to management and as one of the standards by which success or failure would be judged.

5. These principles were endorsed by the Select Committee on Nationalised Industries and generally accepted as setting a sound basis for future relations and control. In practice, however, the new approach did not last, and in the first half of the 1970s the relations between governments and the industries deteriorated. This arose in part because of disagreements and uncertainty over the plans of particular industries. But, the main single factor which undermined the principles in the 1967 White Paper was the price restraint policies of the early 1970s. The Post Office and the gas and electricity industries were forced into deficit and for the first time ever had to be subsidised to cover their losses, which totalled £1182 million over the period. The grants which were already being paid to British Rail escalated as their fares and charges were held down and their deficit increased. As a result of these policies, the financial targets of most of the nationalised industries had to be abandoned and there was little chance to put the 1967 principles to the test.

6. In its report of December 1973, "Capital Investment Procedures", the SCNI concluded that government had failed to meet its objective "of exercising its control publicly and according to well-defined ground rules, without interfering with the management functions of the industries themselves". The Committee accordingly recommended that the Government should arrange for "a detailed study of the role of the nationalised industries in the economy and of the way in which they are to be controlled in the future".

7. In June 1975, in its reply to the SCNI's report, the Government announced that it had asked the NEDO to undertake this enquiry. The NEDO published their report on 18 November 1976. It is a searching and highly critical examination of the relations between the industries and governments. In his introduction to the report, the Director General of the NEDO writes:

"Our enquiry has left us in no doubt that the existing framework of relationships, developed under governments of both main political parties, is unsatisfactory and in need of radical change".

8. Many of the industries, in their written evidence to the Select Committee on Nationalised Industries, generally agree with the NEDO's analysis of the problems. Some comment that their relations with their sponsoring departments have always been generally good and others agree that they have recently improved. Indeed the NEDO acknowledge that their criticisms do not apply to relationships with all the nationalised industries or for all the time to particular industries. The Government agrees, nevertheless, with their general conclusion that relations had deteriorated in the period up to the mid-1970s and needed to be improved. The NEDO present a perceptive and thoughtful analysis of the problems and, while the Government does not accept all their proposals, it welcomes their report as offering a basis on which both the Government and the industries can now build.

The Government's general approach

9. In 1974 the Government set out to put the nationalised industries back on to a sound economic and financial footing. This required substantial price increases to phase out the subsidies necessitated by price restraint, described in paragraph 5 above.

\*Published by the SCNI in their Second Special Report of 1976-77, (HC 345), "Comments by Nationalised Industries on the NEDO Report." As a result, they are generally in a much stronger financial position than they have been for a number of years. The period of rapid price increases needed to deal with the deficits due to price restraint in the early 1970s is over. A more stable, and better, climate of relationship has been established and it is, therefore, now timely to review, and where necessary develop, the principles in the 1967 White Paper. The Government considers that this review, together with the other measures discussed in this White Paper, will lay the foundations for further improvement.

10. An important point which must be emphasised from the beginning is that apart from the fact of public ownership and control many of the nationalised industries have little in common. They vary in size, objectives, markets, financial strength, and social significance. The individual energy and transport industries are subject to overall policies for the sectors in which they operate. The formation of the two new manufacturing corporations, British Aerospace and British Shipbuilders, brings about a further significant shift in the balance of the nationalised industries away from the historical predominance of the public utilities serving a British market. The three manufacturing industries - Steel, Aerospace and Shipbuilding - together with British Airways and the British National Oil Corporation all operate in highly competitive international markets with their prices largely set by international trading conditions. It is important that these industries, and indeed those which are competing in domestic markets, are able to respond quickly to opportunities and competitive forces and that the Government's arrangements with them should recognise this. It follows that, while there are a number of important principles of wide application, it is essential throughout to take account of the varying circumstances of the different industries and to be ready to find solutions and a frame- of control appropriate to the particular needs and market situations of each of them. This need for a flexible approach to match circumstances is recognised by the NEDO.

11. The NEDO discuss in some detail the crucial question whether the Government should aim to stand back from the industries, and operate an "arms-length" relationship, or whether it should be involved more closely. Their conclusions on this are worth quoting:

"It seems to us that the thinking behind the wholly arm's length approach is based on a false analogy with the private sector. The financial structures and disciplines in the public and private sectors are very different - not least because the ultimate sanction of liquidation is in practice absent in the major nationalised industries. Moreover, their importance as employers, suppliers and customers, and the economic and social implications of their actions make it right as well as inevitable that government should take a close interest in their strategies. The issues of public policy involved are so large and politically sensitive that it is not realistic to suppose that they would ever be left for long to management alone to determine, subject only to periodic checks on their financial performance."

The Government agrees with this. The question is how best to construct with each industry a relationship which is sufficiently close, but in which the responsibilities and objectives of both the Government and the industry are well defined and well understood. Board Structure

12. The NEDO recommend a radical change in the current institutional arrangements. As a general approach, but with modifications to suit circumstances, they propose that each nationalised industry should be run by a Policy Council responsible for strategy and a Corporation Board acting as the executive authority. The Policy Council would be under a President of high personal standing, and preferably a part-time. It would include the Chairman and some members of the Corporation Board, representatives of the main interest groups concerned with the industry - Government Departments, trade unions, and customers - and also members reflecting other independent viewpoints. It would be supported by a small staff seconded from departments, the Corporation and trade unions. Its main functions would be to agree corporate objectives and the strategies to achieve them; to establish performance criteria; to endorse corporate plans; and to monitor performance.

13. The Corporation Board would manage the industry within the framework of these objectives, strategies and criteria. One of the main roles of the President of the Policy Council would be to protect the Corporation Board, which would have a separate Chairman, from intervention by Government in carrying out its responsibilities. The Policy Council would appoint the Chairman and members of the Board.

14. The Government agrees that, in dealing with the nationalised industries, its main concern should be with strategic and major issues rather than day-to-day management. It also generally accepts NEDO's argument that the evolution of strategic plans for nationalised industries should be a combined operation, involving the interest groups which are closely concerned with their content and implementation and which often have the power to frustrate them if they wish. However, the Government does not accept that NEDO's proposal for Policy Councils and Corporation Boards is the best way of achieving these objectives and of improving its relations with the industries.

15. Before reaching this conclusion the Government discussed the proposal with the nationalised industries, and took account of the comments in their published evidence to the SCNI. None of the industries favours - and some reject in very, strong terms - the proposal for a Policy Council standing in line of command between the Minister and an executive Board which runs the industry. They assume that Ministers would not delegate their present powers, or concern with matters of major importance, to the Policy Council (and this appears to be implicit in the NEDO's proposal if it were to achieve the desired objective of limiting Ministerial intervention). This assumption is right. The Government is the sole shareholder of the nationalised industries, and their principal banker; and, as the NEDO acknowledge, the industries' strategies and main policy decisions involve questions of major political and public importance with which the Government must be concerned.

16. The Government believes that, contrary to the NEDO's objectives, these arrangements would slow down the process of decision making and would confuse responsibility and accountability. The Minister and the Policy Council would both be concerned with strategic and major issues. The functions of the Policy Council and the Corporation Board would overlap because, as many of the industries have pointed out, the distinction between strategic and executive decisions is not in practice always as sharp and as clear cut as NEDO's proposals imply. Thus, the Government, the Policy Council and the Corporation Board could all be concerned with strategic and major issues, and instead of clarifying responsibilities and streamlining decisions, the NEDO's Proposals would add an additional layer of authority, expressed in legislation, in a Policy Council whose own responsibilities would in practice have unclear demarcation lines.

17. A number of the nationalised industries have also pointed out that their present boards are supported by management committees which deal with many of the day to day issues involved in the running of the business. These arrangements are flexible and tailored to the requirements of the particular industry whose Chairman can readily modify them if necessary. They are, however, fundamentally different from a statutory two tier structure, with the powers and functions of the senior board "explicitly and formally distinguished from those of executive management," as proposed by NEDO.

18. In their paper of November 1977 to the SCNI, the NEDO have criticised the industries' reactions to their proposal for Policy Councils and Corporation Boards. They argue that it is unacceptable for the industries to agree generally with their analysis of the failings of the arrangements in the past but to reject any proposals for structural or other changes to ensure a better and more stable relationship in future. While the Government recognises the deficiencies which led the NEDO to make their recommendations, many have been overcome since NEDO conducted their study and the Government does not agree that it follows that major structural changes in the boards are a necessary condition of maintaining the recent improvement in relationships.

19. The fact that the Government does not intend to introduce Policy Councils and Corporation Boards does not mean, however, that it rejects the argument that changes are necessary to bring about further improvements. The Government is already developing a number of new arrangements on the lines proposed by NEDO, and it will now introduce others. Later parts of this Section explain the various ways in which the main interest groups concerned with the industries will be more involved in the formulation of their policies, either by board membership or by improved consultative and participative arrangements. The procedures for the discussion of corporate plans are being developed with the aim of giving them a central place in the relationship between the nationalised industries and the sponsoring departments, and of providing a systematic framework for reaching agreement on long term objectives and strategies. Information on these plans, on financial targets and any sectoral or social objectives set to the industries, on cash limits, and on performance and service indicators and aims will be published in the industries' annual reports and accounts. These arrangements, and the proposed new power to give specific directions where necessary, will help to clarify the respective roles of the Boards and the Government, and they will provide a better basis for Parliament and the public to judge the performance of the industries and the role of the Government in their operations. New Powers to issue specific directions to Boards

20. The present statutes empower the Secretary of State to give the Boards directions of "a general character" on matters which appear to him to affect the national interest and, in some cases, directions on particular subjects which are specified in the statutes. However, the power to give general directions does not allow the Secretary of State to direct an individual industry on a particular matter, however important, unless that particular power of direction is specified in the statutes. In the absence of powers to give specific directions, governments have had to rely on a process of persuasion. Because this has been informal, accountability for decisions has on occasions been blurred and this has caused friction and resentment. The Government considers that this situation should be avoided, and that it is wrong in principle that a Minister cannot statutorily intervene in specific matters subject to the approval of Parliament. It agrees, therefore, with NEDO that the present powers should be extended to remedy this deficiency by enabling the Minister to give a Board either general or specific directions on matters which appeared to him to affect the national interest. An important advantage of the new power would be that when a direction was given it would clarify accountability by indicating formally and publicly where the Government had decided to overrule a Board's judgement or to direct it to do something in the national interest. The Government will put forward and in the case of the proposals accordingly for amendment of the statutes, Electricity Supply industry it has included a provision in the Electricity and Nuclear Materials Bill introduced in February. These legislative proposals will include a number of safeguards. A Minister would not be able to issue a specific direction before he has consulted the industry in question. The direction would be in the form of a statutory instrument, subject to Parliamentary procedures. The Minister would be required to publish, when the statutory instrument was presented, an estimate of the extra cost if any to the industry of implementing the direction. If the industry did not agree with this, their estimate would be published with the Government's comments on it. Compensation would be paid to cover the extra cost and the legislation would provide for this. There would also be powers to override, where necessary and subject to European Community obligations, any other statutory duties with which the specific direction might conflict. It would not be possible to make a specific direction which would have the effect of extending or restricting the existing statutory powers of an industry; that would be a matter for new primary legislation.

21. If Parliament approves these powers the Government intends to use them sparingly. One of the themes running through this White Paper is that the relationship between governments and nationalised industries is close; and there will continue to be many issues on which the industries and the Government will reach agreement without the issue of specific directions and without any confusion of responsibility or accountability. Moreover, Ministers do not intend that, as a result of the availability of this power, they should be drawn into detailed intervention or Parliamentary discussion of a multitude of matters of day to day management, which should in principle, and must in practice, be left to those responsible for managing and running these industries without the intervention of Ministers or Parliament. Pay and appointment of board members

22. When the Review Body on Top Salaries in their Sixth Report recommended revised salaries for nationalised industry Board Members and Chairmen for 1 January 1975 the Government deferred a decision on the recommendations for wider policy reasons. As a result the pay of Board Members and Chairmen has fallen sharply in real terms, far more so relatively than that of most other people, and there are anomalies in the pay structure in many of the industries with board members earning less than some senior staff working for them.

23. On 15 December the Government announced that the most that could be allowed at the present time was a 5% general increase from 1 January 1978, with up to 10% for the less well paid board members tapered to ensure that the 5% applied above £13,000 a year. In reaching this decision the Government had regard to the measures still being taken in the national interest to control inflation which continue to demand considerable restraint from all sections of the community. The Government recognised that this still leaves nationalised industry board members significantly out of line with their counterparts, and it will look again at the way forward when the Review Body on Top Salaries makes its next recommendations for April 1978.

24. All appointments to Boards will continue to be made by the responsible Minister who will consult the Chairman of the industry concerned on each appointment, and call on the Public Appointments Unit in the Civil Service Department when appropriate. A number of the industries have been critical of delays in filling vacancies on the boards. This is sometimes unavoidable but the Government readily accepts that the aim must be to avoid delays wherever possible. The composition of boards

25. The composition of each board will be settled on an industry by industry basis by the Ministers concerned after discussion with the Chairmen. The Government's proposals for the appointment of employee representatives are explained in paragraphs 28 and 29 on industrial democracy; and, as pointed out in paragraph 30, consumer members will be appointed to some boards. The Government will continue to appoint part-time non-executive members who are not representative of interest groups but who have the experience to make an important contribution to the running of the industries.

26. The Government has also decided that in some industries a civil servant from the sponsoring department, and in a few cases from the Treasury too, will be appointed to boards after consultation with the Chairmen concerned. The purpose is to give the department a clearer understanding of the industry, and a better insight into its problems; but the Government also recognises that in the different circumstances of the various industries appointment of civil servants to the boards will not necessarily be the best way of securing this result in every industry. It will, however, be worthwhile where it means that the Government can be aware at an earlier stage than now of the thinking of the boards and, for their part, the boards can have a clearer view, at a formative stage of their planning, of the wider objectives and implications of Government policy. There is a potential difficulty arising from the dual allegiance which a civil servant would have to his Minister on the one hand and as a board member sharing the corporate responsibility of the Board on the other hand. So long as this duality does not in practice produce irreconcilable conflict, it presents no obstacle to adopting the arrangement. There are already civil servants on the boards of the British National Oil Corporation and of the Atomic Energy Authority. This has worked well and their presence has proved useful both for the Government and for the two Corporations. The practical course is to experiment with the arrangement in other cases also where it is expected to be helpful.

27. Management and the unions in the nationalised industries are already making progress in developing new arrangements for consultation and participation. In the Post Office they have agreed on an experiment, lasting for two years, for a new Board with, in addition to the Chairmen, seven management and seven union members, and five independent members. In some of the other industries, the management and the unions have chosen to put the emphasis on the improvement of their existing consultative procedures rather than on involvement at Board level. The Government welcomes these initiatives, and intends to encourage progress in introducing and improving schemes of industrial democracy at all levels in the nationalised industries. It has accordingly asked the Chairmen of the nationalised industries to consult with the unions in each industry, where they are not already doing so, and to make joint proposals for further improvements in consultation and participation. The Government has asked the Chairmen to put forward their proposals by August 1978. They might range from worker representation at Board and lower levels to further developments in consultative and participative procedures. It is likely that any proposals which emerge can go ahead quickly under present legislation. However, if in any nationalised industries it is necessary to amend the statutes to allow for an experiment, or for new arrangements, the Government will introduce the necessary legislation, as it did for the Post Office experiment.

28. The Government will publish a White Paper on its views on the way forward in industrial democracy in the private sector as well as the nationalised industries.

29. In April 1975 the Government asked the National Consumer Council (NCC) to review the arrangements for consumer representation in the nationalised industries. The recommendations in the NCC's thorough and detailed report were not concerned with the manufacturing industries such as the British Steel Corporation but only with those industries which impinge directly on the consumer. It was published in August 1976 and the Government has had wide-ranging consultations on its recommendations, some of which it has already implemented. The Government sees an important continuing role for the nationalised industry consumer councils as spokesmen and guardians of the consumer interest, working in close association with the NCC at national, and with local authority and other advisory services at local, level. It also sees a role for consumer members on some nationalised industry boards.

30. Powers of consumer councils. The NCC were concerned that nationalised industries should give more weight to the views of their consumer councils, and recommended in particular that the Government should have a power to issue directions to an industry following consumer council recommendations; such powers already exist in respect of several of the nationalised industries concerned but there are some important exceptions. For the most part, normal relations between consumer councils and their industries will make Government intervention of this kind unnecessary. In most cases in which a consumer council makes a recommendation, the industry and council should be able to reach agreement between themselves on the necessary action. The same will be true also of discussions on the amount of information which the industries should disclose to the councils and the minimum period of notice which they should give to them before implementing the major proposals. In cases of disagreement it would be open to a consumer council to make representations to the Government, which would decide whether to give the industry a specific direction, using, where necessary, the new powers discussed in paragraphs 20-22 above, and subject, as noted there, to any conflict with our Treaty of Paris obligations. The NCC has also proposed that,

"Consumers and the nationalised industries, report by National Consumer Council to the Secretary of State, Prices and Consumer Protection." HMSO

CONFIDENTIAL whenever an industry failed to act on a recommendation from its consumer council the Secretary of State should be required to issue a direction unless both Houses of Parliament, by Order, specifically agreed that he should not. The Government does not accept this view: it considers that existing procedures are adequate to ensure that Parliament has an opportunity to challenge Ministerial decisions. The Government, however, welcomes the proposal that research reports by the councils should be available to the Select Committee on Nationalised Industries, and notes that the Select Committee already receives evidence from them.

32. Energy. In the light of the recommendations of the NCC and of the Plowden Committee, the Government has established an Electricity Consumers' Council (ECC) for England and Wales, initially on a non-statutory basis. The Council will fill an important gap in previous arrangements by giving English and Welsh electricity consumers an effective voice at national, as well as regional, level, where it will operate alongside the National Gas and Domestic Coal Consumers' Councils. The Government has introduced legislation to make the ECC statutory and to give it responsibility for co-ordinating regional electricity consumer representation. The National Gas Consumers' Council (NGCC) will continue to guide and co-ordinate the activities of the regional councils to ensure that gas consumers' views are given coherent and authoritative expression. The Government also intends to introduce legislation giving the Domestic Coal Consumers Council a statutory right to be informed by the National Coal Board of its plans, arrangements and proposals, and imposing a duty on the Board to consider any representations made by the Council.

33. Consumer Advice Centres and Citizens' Advice Bureaux already deal with large numbers of enquiries and complaints about public sector goods and services generally and the Government agrees with the NCC that they are an easily identified and convenient source of advice and help for consumers with problems of this kind including domestic fuel problems. However, the Government believes that the regional gas and area electricity consumers' and consultative councils, with their district committees, should continue to play a valuable role as specialists in addition to the generalist agencies, as well as

\*The structure of the Electricity Supply Industry in England and Wales, report by Committee of Enquiry to the Secretary of State for Energy: Cmd 6398. feeding in consumers' views to the national bodies. Over 2000 experienced men and women give their time voluntarily in this work and are available with advice and assistance to the public outside normal hours; they play an important part in advising local nationalised industry management and monitoring their performance, and provide the grassroots contact for formulating a consumer view at national level. The Government proposes to continue its support for these bodies, but will have further discussions with the ECC and NGCC and those responsible for the local authority and other Generalist services with a view to ensuring the most efficient liaison and integration between the various advice agencies.

34. The newly established National Energy Commission, on which domestic and industrial consumers are represented, will provide a valuable forum in which a consumer view can be brought to bear at the highest level. The Government has asked the NCC to give the three energy consumer council representatives its support in coordinating the views of consumer and voluntary organisations and providing research and secretarial services.

35. Surface Transport. The Government intends in due course, to promote legislation to extend the powers of the existing Central Transport Consultative Committee, at present prescribed by Section 56 of the Transport Act 1962. It will be renamed the National Transport Consumers' Council (NTCC), and enabled to consider the general tariff structure of the British Railways Board's railway passenger and parcels services; to consider a wide range of services and facilities provided by other transport operators, including bus services; and to make appropriate representations to the operators, the Traffic Commissioners or the Price Commission, as the case may be.

36. The Government believes, however, that it would be inappropriate for complaints about individual bus services to be handled by a national body. Furthermore the proposed introduction of Public Transport Plans will place upon shire counties in England and Wales additional responsibilities in the planning of bus services. In these circumstances the Government takes the view that county Councils should set up, under their general powers, advisory committees with representatives of consumer interests as well as council members. These advisory committees, which might be modelled upon the Transport Users' Advisory Committees already in existence in Passenger Transport Authority areas, would assist the county councils in their preparation of Public Transport Plans, deal with complaints about bus services in their area and cooperate with local generalist advice services. They will report to the local authority who would, under existing powers, be competent to make representations to the Traffic Commissioners as appropriate. The local authorities, the new advisory committees and the existing Area Transport Users' Consultative Committees (TUCCs) would be expected to establish liaison on matters of common interest. The remit of such advisory committees, as of the TUCCs, may later need to be reviewed in the light of Government decisions following consultations on the issues relating to local railway services that are particularly cost-ineffective, as set out in paragraphs 93-105 of the White Paper on Transport Policy (Cmd 6836).

37. Posts and Telecommunications. The Government will give careful consideration to the recommendations of the Post Office Review Committee relating to consumer representation. In the meantime, it has decided as part of the two year experiment in industrial democracy in the Post Office that there should be two members with experience of consumer affairs on the Post Office, appointed after consultation with the Secretary of State for Prices and Consumer Protection.

38. Aviation. The Civil Aviation Authority, which is responsible for the Airline Users' Committee, has given the Committee new terms of reference which ensure that it has a clearly autonomous position with an independent Chairman and secretariat, a more positive role in furthering the interests of air transport users and a responsibility to co-operate with the airport consultative committees.

39. Scotland, Wales and Northern Ireland. For those nationalised industries which operate on a United Kingdom basis, the arrangements described will also apply in Scotland, Wales and Northern Ireland, with minor variations, though account will be taken of the particular need to provide for the consideration of national issues of special concern to each of those countries. In Scotland, however, the electricity and bus industries need separate arrangements. The two Scottish Electricity Consultative Councils will remain, with their Joint Secretariat, responsible to the Secretary of State for Scotland, as recommended by the Scottish Consumer Council. The main operator of buses, outside the four city areas, is the Scottish Transport Group (STG), responsibility for which is to be devolved. No change is proposed at present in the arrangements for representation of consumer interests in relation to any of the STG's operations or to the Scottish bus industry generally; these are matters which the Scottish Administration will wish to consider in due course in the light of its responsibility for the STG and for local authority transport functions. In Northern Ireland, the Electricity Consumers' Council, and the Transport Users' Committee (which deals with bus, rail and airport facilities) will continue to represent their particular consumer interests, with liaison as appropriate with other consumer bodies in the United Kingdom. Other consultative arrangements

40. In addition to the proposals discussed so far, the Government is developing other ways of involving the main interest groups in the forward planning of an industry or a sector. Since 1974 the main policy questions in the coal industry have been discussed on a tripartite basis between the Government, the Coal Board and the coal unions. Last year the Secretary of State for Energy appointed an Energy Commission which will advise him on the development of an energy strategy for the United Kingdom and on other energy policy issues. The Commission includes representatives of the energy industries, and trade unions, and industrial, consumer and other interests. The recent White Paper on Transport Policy, Cmnd 6836, considered a number of ways in which the Government wanted to see consultation on the formulation and execution of transport policy improved, both at the local level and nationally. In addition, the Government is exploring further with the NEDO and with both sides of industry its ideas of setting up an Economic Development Committee for transport as one means of promoting, in the context of the industrial strategy, the regular consultation between the Government, management and the unions on plans for transport. Relations with suppliers

41. The NEDO point out that the nationalised industries' technical dominance and the scale of their purchases means that certain supplying industries have become almost wholly dependent on their strategic decisions and related investment programmes. Because of this several important studies have been commissioned by the National Economic Development Council since 1975 on various aspects of the relationship between the industries and their suppliers. This relationship is generally close, and given the strong bond of common interest between the two, the Government attaches a good deal of importance to this. A number of ideas and improvements were discussed in a NEDO report in 1975, and the involvement of the nationalised industries in the Economic Development Committees and associated NEDO working parties and industrial strategy sector groups gives both the industries and their suppliers a forum for tackling further questions of common interest.

42. There is also considerable scope for the nationalised industries and their suppliers to co-operate in export promotion to their mutual benefit. The NEDO studies of this include detailed analyses of the technical specifications laid down by the nationalised industries, with a view to aligning them where possible with international requirements so as to give the supplying industries a better chance of securing export orders; and also the promotion of co-operation between nationalised and private industry to allow them to compete together for major overseas projects, such as steelworks and railway construction and modernisation. In 1976, the nationalised industries set up special arrangements to promote collaboration between themselves and their customers and suppliers in the pursuit and development of exports. In addition, there are growing opportunities for sales of hardware and equipment by nationalised industries acting on their own account, or in participation with the private sector. The Government strongly welcomes all these initiatives and the positive role which the nationalised industries are taking, both jointly with the private sector and also on their own behalf in selling consultancy services to overseas countries and developing export opportunities generally. Corporate Plans and Investment and Financing Reviews

43. For many years the development plans and investment programmes of the nationalised industries, covering periods of 5 years ahead, have increasingly been formulated within the wider context of both the industries' and the Government's objectives and policies. This process of corporate planning, covering various time periods, involves a continuing dialogue on long-term strategy, medium-term development plans, and annual operating plans and budgets. The industries look to the Government for guidance on industrial policies, on economic prospects, and where appropriate on sectoral policies, including the social objectives underlying the payment of grant from public funds. The Government looks to the industries for data on markets, supplies and production. The development of this process is more advanced with some of the industries than others. Its benefits are already becoming apparent in the energy sector where over the past year or so a joint Working Group on Energy Strategy (with membership drawn at Board level from the nationalised industries and from Government Departments) has contributed materially to the harmonization of planning timetables and procedures, to the understanding of the industries' and Government's medium-term forecasting methods, and in particular to the joint examination of the implications of alternative energy sector strategies for the plans and prospects of the industries. The process of joint examination of issues affecting policies and plans is now to be carried further in the recently formed Energy Commission for Energy under the chairmanship of the Secretary of State. There have also been valuable developments in corporate planning in other nationalised industries, and the legislation establishing British Aerospace and British Shipbuilders requires the two Corporations in formulating their corporate plans to act on lines settled from time to time with the approval of the Secretary of State for Industry. The Railways Act 1974 made similar provision in relation to the Railways Board.

44. The Government considers that the corporate plan, and the examination of strategic options, should have a central place in the relationship between the nationalised industries and their sponsoring departments. As corporate planning is established more widely it will enable the annual review of the industries' medium-term investment programmes to take place in the context of known and understood longer term strategies. This is not to say that there will be no changes from year to year in the five year plans of the industries for implementing the agreed strategies. The industries regularly revise their five year programme, often substantially, to take account of changes in the outlook for the economy, in the demand for their particular products, in relative costs and prices, in the burden of their financing requirements, and in physical progress in the installation of new plants or of new buildings. Nationalised industries, like any commercial organisation, must continue to show flexibility and to make such changes. Moreover the strategic framework itself cannot be regarded as immutable. From time to time there are major long-term reviews of overall policy, covering either the whole future strategy of an industry or some crucial aspect of it, such as a technological decision on the choice of a new system. These represent an important turning point for an industry, and the Government accepts that, once long-term policy decisions are taken on this basis, they should not be reopened unless and until there has been a material change of circumstances. So that the Select Committee on Nationalised Industries, and the public, can be better informed of the industries' objectives the Government has asked them to publish in their annual reports and accounts a summary of the broad objectives in their corporate plan, and in any major review, and any Government response to them.

45. The NEDO point out that the investment plans of a number of the nationalised industries have suffered over the years from intervention by Governments, through short-term cuts to reduce public expenditure or through intervention in previously agreed strategic plans. The dialogue between the Government and industries in the corporate planning Process should help to provide a more stable framework. In addition the Government has made two changes in its procedures which it believes improve the way in which the industries' expenditure plans are handled and publicly presented.

46. Following an initiative in the NEDC, in 1975, Ministers agreed that they would aim to give the industries by the end of the summer, rather than the end of year, approval for 100% of their agreed investment programme for one year ahead, 85% for the second year and 70% for the third year (for which, under the previous procedures, no approval had been given at all). This new procedure helps the nationalised industries directly by enabling them to get on with implementing and rolling forward their plans. It also puts them in a position where they can help their supplying industries by drawing up firm plans earlier than had been possible hitherto.

47. The NEDO commented on the presentation of the nationalised industries' figure in statistics of public expenditure, and the Government has made changes in line with their thinking. Under these new arrangements the investment programmes of the industries are still published in Public Expenditure White Papers, but it is the estimates of the funds to be provided towards this investment, in the form of loans, Public Dividend Capital or grants, which are included in the public expenditure totals. This new presentation recognises the essential difference between the nationalised industries, which finance a great deal of their investment from their earnings, and the generality of non-trading public services. The Government believes that it will also be helpful to the industries if on any future occasions it is necessary to involve them in any general exercise to reduce the planned level of public expenditure. Whereas previously any cuts they made had to be in their investment programmes, in future they will in principle be able as an alternative to take any other action which would reduce their requirements for external finance - such as cost savings and, subject to counter inflation policies, price increases. The presentation of these figures in the Public Expenditure White Paper shows loans and Public Dividend Capital, on which the industries are expected to pay interest and dividends, separately from grants given for social and regional purposes.

48. The NEDO consider that the boards are not effectively required to account for their performance in a systematic or objective manner. They point out that there is no external audit mechanism - additional to the present financial audit procedures - which might provide reassurance to Government and Parliament about the effectiveness of management organisation and procedures within the industries. They recommend that the annual report and accounts of each industry should in future include a statement of financial and other criteria and of achievement against them.

49. It is the responsibility of each board to monitor performance and efficiency within its industry but the Government agrees that it is also essential for the industries to account effectively to Parliament and to the public. It has, therefore, asked each of them to include in its annual report a statement summarising and bringing together the Government's main current instructions and guidance, and also information on how it is measuring up to its objectives. There may be some information which an industry cannot publish for reasons of commercial confidentiality. But in general the statement would include, for example, the main points in the corporate plan and any Government response to them (see paragraph 44); the financial target, and the accompanying Parliamentary statement explaining it, including any sectoral and social objectives set for the industry (paragraph 73); the cash limit (paragraphs 79-82); suitable aims in terms of performance and service (paragraph 78); and any general or specific directions given to it (paragraph 20). In its statement of how well it was measuring up to these objectives, the industry would compare its financial performance against its target and also its progress against its published performance and service aims. The systematic and regular publication of this information will be an important development in response to the NEDO's report and one which will be helpful to the Select Committee on Nationalised Industries, and to Parliament generally, in examining and monitoring the performance of the industries, and of the departments which deal with them.

50. There are also a number of other ways in which the industries' activities will come under independent scrutiny. Under the Price Commission Act of July 1977, the Price Commission has discretion, subject to Ministerial veto, to investigate most price increases proposed by the nationalised industries. (The main exceptions are bus and air fares, which are controlled by the Traffic Commissioners and by the Civil Aviation Authority, and coal and most steel products which are subject to European Coal and Steel Community regulations). If Ministers direct it to do so, the Commission can also examine a nationalised industry which is a monopoly supplier. Secondly, the Government expects the consumer councils to play an important role in monitoring the industries' responsiveness to the needs of their customers and in making recommendations on the services they give; and a number of ways in which the consumer council arrangements have been strengthened are described in paragraphs 30-39. Thirdly, the Government will be prepared on occasion to appoint special committees of enquiry to examine the structure, performance and plans of particular industries where it appears that there is a need for a far ranging review. The Government will keep under review the possibility of strengthening arrangements for the external monitoring of those industries which enjoy substantial protection from competition.

51. The Government also expects the industries to take the initiative in strengthening their own systems for control and monitoring. It therefore welcomes the development of Audit Committees, which the National Coal Board, the British Steel Corporation and a number of private sector companies have recently been introducing, whereby a special group, usually including part-time non-executive directors, examine and report on annual financial statements, audit arrangements and internal financial controls. The Government believes that this is a useful innovation which other nationalised industries may wish to adopt. It hopes that they will develop further the role of these Audit Committees, or set up comparable arrangements, to look more generally at questions of efficiency and performance within their industry. The Government also expects that, in the normal exercise of their management functions, the industries will continue to take the initiative in calling in management consultants to undertake special studies when necessary. III. THE FINANCIAL AND ECONOMIC FRAMEWORK

52. The nationalised industries are major users of national resources. They employ about 1,700,000 people, or 7% of the country's total labour force. Their total investment this year and next is about £3,500 million at 1977 prices, and in 1976 they accounted for 14% of total fixed investment. A considerable part of their capital requirements is financed by advances from, or guaranteed by, the Government, and in 1976-77 these represented about 15% of the total Public Sector Borrowing Requirement of £8,800 million. In 1976 they contributed about 10% of the total output of the UK economy. They dominate four strategic sectors of economic activity: energy, public transport, communications and iron and steel. They supply basic goods and services to industry, and essentials of life to individual consumers. They are themselves major customers of some of the capital goods industries, and the scale of their purchases means that some of these supplying industries are heavily dependent on their strategic decisions and investment. In short, the nationalised industries have a pervasive influence throughout the economy on investment, employment, industrial costs, and on the cost of living. The share of national resources going to them, and the efficiency with which they use these resources, are matters of major importance.

53. This is why the Government has the responsibility to set out the broad financial and economic framework within which they want the industries to operate. The consequences of the price restraint policies of the early 1970s, and the